SPX Credit Spread Trader

[domestic]

"Where is the profit coming from if the spread is underwater from when it was initiated?"

i received a 3.65 credit, to me, that is the max profit. the goal was to buy it back for 3.10. i have been doing this type of trade for years, only taking a .5 or .25 profit. i did have it too, just this time (out of more than 50 times) i did not close it, i guess i got a little greedy. normally i would roll to the next month, but with finding like minded folks here, i am looking for other perspectives. because of the large credit in relation to the amount of spread points i do have some possibilities. ideally i would like to close it with that .5 profit. i might add, there is more than one contract involved.

 

[El OchoCinco]

NEW SIMULTANEOUS POSITION- SELLING THE BABIES

After studying some Cottle (How you doin' Mr . COT-tle) I was looking into the idea os doing SPX FLYs and then selling off the baby imbedded FLYs in pieces to possibly turn the FLY into a net credit with potential for greater profit if the SPX is near the body at expiration.

For those not familairy with Cottle or baby FLYs, let me elaborate. If you have a $90/$100/$110 strike FLY then there are 4 imbedded baby butterflies:

#1 +1 -2 +1
#2 +1 -2 +1
#3 +1 -2 +1
#4 +1 -2 +1

$90 $95 $100 $105 $110

= +1 -2 +1


So if the stock moves to $95 and hovers and the embedded $90/$95/$100 butterfly is at a good price, you can sell of that imbedded FLY and you are left with:

+1 -2 +1
+1 -2 +1

+1 -2 +1

$90 $95 $100 $105 $110

= +2 -3 +1

Now you have a skip-strike FLY which costs you the original debit minus the premium from selling the $90/$95/$100 FLY. If the market bounces around the strikes, you could sell of a few of the BABYs at a time and harvest that premium and perhaps get to a net credit profit or more.

The goal for taking off the 90/95/100 FLY in the above is, if the premium is worth it:

a) you feel the market is gonna drop further outside of your profit zone the sale of the FLY reduces your net debit and your risk

b) if you feel the market is going to bounce around higher than you have taken some money out and still left a FLY in place.

c) if you feel that it might move back and forth, then you can take out the BABYs one at a time and collect the prmeium in pieces.

If the stock moves out of the range quickly, you still have limited risk and could perhaps open another FLY to surround the price movement.


I have been toying around with this for a few weeks and now want to test it out. This is NOT a hedge for credit spreads, it is a separate type of trade altogether but it is a spread on SPX, with the hopes of turning it into a credit spread so sort of relevant. This strategy also requires some bias ahead of time since you can use OTM FLYs (with respect to the body strikes).

In the next post I will detail a new SELLING BABIES FLY I put on today.

 

[momoneythansens]

My question was in reference to the butterfly suggestion that I quoted. I was soliciting how that conversion could achieve profits if the original spread is underwater i.e. the question wasn't directed at you or questioning the merits of your initial trade

Quote from domestic:

"Where is the profit coming from if the spread is underwater from when it was initiated?"

i received a 3.65 credit, to me, that is the max profit. the goal was to buy it back for 3.10. i have been doing this type of trade for years, only taking a .5 or .25 profit. i did have it too, just this time (out of more than 50 times) i did not close it, i guess i got a little greedy. normally i would roll to the next month, but with finding like minded folks here, i am looking for other perspectives. because of the large credit in relation to the amount of spread points i do have some possibilities. ideally i would like to close it with that .5 profit. i might add, there is more than one contract involved.

 

[momoneythansens]

Quote from optioncoach:

NEW SIMULTANEOUS POSITION- SELLING THE BABIES

After studying some Cottle (How you doin' Mr . COT-tle) I was looking into the idea os doing SPX FLYs and then selling off the baby imbedded FLYs in pieces to possibly turn the FLY into a net credit with potential for greater profit if the SPX is near the body at expiration.

Good luck. Caveat: it's difficult to take meaningful profits on flies outside of 10 days to exp.

If the stock moves out of the range quickly, you still have limited risk and could perhaps open another FLY to surround the price movement.

By adding some extra flies you can also adjust the original fly into a condor to accomodate a wider price range, though you are possibly locking in a loss by doing so. This is analagous to "rolling down" a put credit spread.

Good luck again. Have had great success doing above with minimal risk.

MoMoney.

 

[El OchoCinco]

SELLING BABIES FLY

Opened a new FLY today based on my SELLING BABIES FLY strategy. I am only doing 1 FLY at a time to get a feel for this and see if it is viable so the risk is extremely low.


LONG MAR SPX 1260/1230/1200 Put FLY @ $5.45

Bearish bias in this FLY given the market conditions now. In other words looking for market to drift lower over the next fee weeks to MAR expiration. I may also add the Call FLY and play it both sides. I am providing a chart of the embedded Baby Flys below .

I am risking $545 to make $2,455 and I can adjust my risk and profit by selling those BABIES. Invite you to follow along and see how it plays out.

 

[momoneythansens]

Barrage of posts from me here LOL. Adding the CALL fly is the same as just doubling up the PUT fly or adding an iron fly with the same strikes. What is your intention for doing so?

Quote from optioncoach:

I may also add the Call FLY and play it both sides.

 

[El OchoCinco]

Sorry for the confusion, I meant adding the Call Fly on the other side, i.e., perhaps the 1260/1290/1320 Call FLY if my bias changed and play it in both directions from the current 1260 value. If the market moved higher from now on, the current Put FLY would not allow any BABY selling. But one thing I am looking into is whether I should open the PUT and CALL OTM FLYs at the same time and trade off the one which has the index in its range.

Quote from momoneythansens:

Barrage of posts from me here LOL. Adding the CALL fly is the same as just doubling up the PUT fly or adding an iron fly with the same strikes. What is your intention for doing so?

 

[ryank]

Quote from momoneythansens:

My question was in reference to the butterfly suggestion that I quoted. I was soliciting how that conversion could achieve profits if the original spread is underwater i.e. the question wasn't directed at you or questioning the merits of your initial trade

Maybe I am missing something. The original credit from the 1265/1275 spread was $3.65. If he purchases the 1255/1265 spread for $4.70 (current mid for arguments sake) he has a net debit of $1.05. Max profit would be $895, max loss of $105 now instead of $635. When I looked at the quotes earlier today before the sell-off the mid on the debit spread was pretty close to his original credit. Am I looking at this wrong?

ryan

 

[momoneythansens]

OK, got it. Had I taken 2 seconds to examine the strikes I probably would have realised that's what you meant. However, good to clarify for everyone's benefit.

Essentially we're talking about the double butterfly strategy if you add the CALL fly. If you're trading a European exercise product like SPX then it doesn't make any difference if you trade both as PUT flies or CALL flies or IRON etc.

For those reading that haven't followed this thread since the beginning, here are some notes by an ET member (forget who) on the double butterfly strategy (doesn't address with BABY fly trading):

http://www.kaininito.com/options/articles/2005-11-01.html

Also some general discussion on butterflies at ToS that people might be interested in. Touches upon the double butterfly too:

http://mediaserver.thinkorswim.com/transcripts/unbalancedButterflies.pdf

MoMoney.

Quote from optioncoach:

Sorry for the confusion, I meant adding the Call Fly on the other side, i.e., perhaps the 1260/1290/1320 Call FLY if my bias changed and play it in both directions from the current 1260 value. If the market moved higher from now on, the current Put FLY would not allow any BABY selling. But one thing I am looking into is whether I should open the PUT and CALL OTM FLYs at the same time and trade off the one which has the index in its range.

 

[ryank]

Quote from optioncoach:

SELLING BABIES FLY

You talked about a prego fly a few weeks ago and now you are talking about baby flies. Gestation period must be pretty short lol!

I am finishing a book called Fortune's Formula that discusses the Kelly formula and Ed Thorp (among others). Pretty interesting reading so far. Cottle's book is up next. I will learn more about all of these frolicking flies from him I'm sure.

ryan