I think you are putting too much emphasis on the profit discussion of the FLY adjustment I mentioned. I said that if possible I could conver the short to the FLY and close the long for a smaller loss.
Once I do that I am out of the trade, but I still have a long FLY sitting there. The point I made is that you simply ignore it and move on. However, there is the chance that the FLY could have value at expiration. it does not matter if it is highly unlikely, I have already adjusted out of the trade and taken my loss and moved on.
The entire zone between the wings is gravy premium if the market should happen to fall there at expiration since any premium you can recover reduces the loss, even if just a little. The FLY is just sitting there and if it expires worthless, you already accounted for it in the adjustment to get out.
If by some miracle the market ends up at 1355 at expiration, then the spread is worth about $5 (slippage) and a huge overall profit. Is it likely? No. Does it matter? No. the FLY was a means to exit the original position. However it still exists until expiration as a potential huge payoff.
Again I must reiterate that I never said the adjustment will turn the loser into a winner. It was a MEANS for an EXIT at a lesser loss than closing the spread outright. I have no EXPECTATIONS from the FLY. However I will not ignore the tiny chance that it could bring in premium at expiration. I never said I expect it or guarantee it, but there is no reason to ignore it completely and not account for it as a lottery ticket you receive when exiting the losing position.
You are looking at the FLY as a new position, I am looking at it as the EXIT of a position. If it expires worthless, then I am right at the expectation I had when I exited the position to begin with. if it makes some money, then I got very lucky and I am not going to turn down the profits.
I agree with everything you say about FLYs. But tis FLY was no entered into with the expectation of a payout. It was a way to cut my losses if possible on the exit.
Quote from MushinSeeker:
Thanks for the clarify OC. I do agree with you that flying the short call vertical would limit the loss somewhat but to expect a profit even a modest one at that is wishful thinking at best.
We all know a fly has a very narrow profit peak. What I've found from real life experience trading them on the floor vs. on the screen is that not only is the profit window small but the peak itself is much less if you do get lucky enough to guess the sweet spot at expiration. The vig, the commish, execution risk when you leg in/out of the spreads all seem to work into tamping down that profit peak. Maybe you have far superior execution skills than I but bid/ask vig is pretty hard to overcome on a 3 way spread by anyone unless you are willing to assume some form of greek risk in the interim. This is why the payoff of a real life fly put on at fair value is usually inferior vis-a-vis the same fly when you model it on a simulator. Some guys here , Riskarb comes into mind , alters the payoff in his favor by taking on some greek risk. To have a point that you can put on a directional spread, have it go against you, repair it by putting on a fly and expecting it to make some profit when a fly at fair value only has marginal profitability is asking too much from the trading gods. In such as scenario, as Mav pointed out, you'd be locking in a loss except for maybe 5% of the price distribution chart. Nothing wrong with limiting the bleeding thru the fly, but to expect profit in a long string of trades in this scenario just ain't happening.
