stringing butterflies together

[sonoma]

Quote from stevenpaul:

Sonoma, I was originally thinking I would try to put them on all at once. That way, you could know upfront what expectations to have.

I thought that might be the case. Have you looked at trying to string them together through the life of a trade?

 

[sle]

Quote from Maverick74:

I've seen guys get really creative and turn a simple position into a 30 legged monster all because they are trying to "harvest" theta. I honestly think you would be better off selling straddles if you are trying to harvest theta. I've never seen these 20 legged spreads work out.

It's called variance swaps

 

[ramaTrade]

Quote from stevenpaul:

I was reading the interview with Tony Saliba in Schwager's __Market Wizards__ about how Saliba would "string together" butterflies to create a broad profit zone. I can manage to produce nice, broad profit zones with calendar spreads (at the cost of excessively long vega exposure), but trying to string together butterflies seems to be impossible. There's always that deep risk zone between the the profit zones. Is it indeed possible to create a seamless profit zone with flies, comparable to that of a multi-calendar spread position, and if so, could we get a little discussion going about it?

Thanks for your feedback, folks.

One of options brokers' favorite strategy.

 

[stevenpaul]

Quote from Joao Fiore:

It's possible to combine two broken wing butterflies to widen the profit zone by choosing the strikes correctly.

Here is a pretty good video by a hedge fund manager, Rob Chastain, speaking to a group for ThinkOrSwim that uses that technique:

http://www.youtube.com/watch?v=o0OFGNnNtg8&feature=BF&list=PLBD245E33D18BCE88&index=3

The first part is a wrap up of a Q&A on futures, then the options' part begins.

Good luck!

Joao

Nice video, Joao. The only thing I don't quite agree with is looking at premium as the primary guide for shorting. I've learned the hard way that inflated premium is a harbinger of a big move. One shorts it at one's own peril. Of course, the double BWB is pretty safe in the event of a big move, as theta strategies go. It's one of my favorite plays. I just put one on today in SPY, come to think of it. Wish me luck. The difficulty for me has been in getting a good size credit, as the market is most likely to stay within the two short strikes. If we get a good move at expiry, we are rewarded for it, rather than penalized as in the normal butterfly (although I haven't seen a big move occur since beginning to do these), and hopefully sufficient time has elapsed preceding a really big move where we run the risk of losing, thus allowing for adjustment without taking losses. Overall, it seems as close to ideal in many ways as anything else I've looked at.

 

[stevenpaul]

Quote from sonoma:

I thought that might be the case. Have you looked at trying to string them together through the life of a trade?

I haven't tried doing that, but in view of the posts by you and MushinSeeker, who suggested the same concept, I am going to try it out on paper. I imagine it's a whole art in itself to leg into a portfolio of butterflies to create an optimal position. As Maverick74 was pointing out earlier, such byzantine positions can quickly spiral out of control, but done with appropriate restraint, I imagine there's some potential. Would you indulge us with some specifics of how you've played this strategy, if you've had occasion to put on flies in this way?

 

[sonoma]

Quote from stevenpaul:

I haven't tried doing that, but in view of the posts by you and MushinSeeker, who suggested the same concept, I am going to try it out on paper. I imagine it's a whole art in itself to leg into a portfolio of butterflies to create an optimal position. As Maverick74 was pointing out earlier, such byzantine positions can quickly spiral out of control, but done with appropriate restraint, I imagine there's some potential. Would you indulge us with some specifics of how you've played this strategy, if you've had occasion to put on flies in this way?

I don't want my comments to seem as if there is any mystery in all this. My suggestion was to compare what you've considered with an alternative. I'm suggesting you simply adhere to the principle of shorting centrally and buying laterally. For instance, if you start with an ATM fly, as the underlying moves, you pick a point at which you admit your initial assumption was incorrect and then move the short option, which will have moved ITM, more centrally. You do this by buying a fly on the relevant side. Your overall inventory is now better positioned with your market view, centered around the underlying. There are some other subtleties, but this type of adjustment is what I would mean as "stringing them together." You can't put on an initial position with flys or calendars "linked" together and arrive at the same p/l.