Hey, I am just a mom & pop amateur retail that is why it takes a long time for me to get anything done. Everything has to be learned first hand.
Welcome to the jungle,
@ironchef - I'm at the same place as you are. The light at the end of the tunnel is that practice plus intelligence result in efficiency... or it could just be the oncoming train. I guess we'll find out!
Studying flies a long time doesn't mean I have a very good understanding of how to make money trading them.
Here is my dilemma on flies:
1. If I mechanically put on an ATM fly, I will net about zero minus commission/slippage as my counter parties will assure me of that due to probability and pricing.
2. So, I need to have an opinion and my opinion has to be more correct than my counter parties for me to come out ahead.
3. If my opinion is so good to out smart my counter parties, I might as well go directional and take advantage of convexity.
Tell me what is wrong with me?
You may be taking the numbers too seriously. Seriously. Also, assuming that you're going to do anything "mechanically" - vs. using your smarts and learned skills - is a losing strategy, and not worth assuming.
Sure, statistically the total expectancy of trading is zero - or, as you note, less. That's a lovely concept, and useful in some ways. But waiting for some statistical bogeyman to come and rob me of everything I've made so far (I wonder how he's going to get back all the money I've spent, the food I ate, etc.?) is a waste of my time; I've got trading to do, interesting things to learn, and so on. It's also worth considering the distribution of profits and losses within the trading population: who the hell says that
every trader must eventually lose his shirt? As the old joke goes, you don't have to outrun the bear - just the other guy (who, in this case, happens to be half of all the traders in the world. I'm willing to take that bet.)
I.e., assuming that you're going to lose is not particularly useful - and anybody who claims that improving your trading skills is
not a net positive is so full of shit that his eyes are brown and muddy.
Now, assuming you're pickin' up what I'm a-layin' down...
Flies, from my (small) experience and based on what I've learned so far, aren't just about direction; they're also about timing. They're not comparable to going purely directional, because the price moving too far (or too soon) in a fly trade will land you in negative P&L. Your opinion in opening one does not have to be "more right" than anyone else's; it just has to be right for the market - which no one can predict with any certainty (and thus be "right" ahead of time on.) If you do, say, a skip-strike put butterfly for a small credit, and the price ends up above your body strike, you
will make that credit, end of story. If the price goes below the body strike, you have additional time/strike distance to adjust it; if it goes below your break-even, you can adjust, or accept stock, or make other decisions. Averages - which is what MMs and such have on their side - be damned; each trade stands or falls on its own, and
that is something where statistics cannot apply.
(I'll note that I've never lost money trading flies yet. In fact, of the several hundred live trades I have taken since I started, more than 90% have resulted in gains, only a small percentage have been actual losses, and only
two have been of any meaningful size (nothing comparable to the total gains.) And I'm still in my first year of trading options.)
The pros on ET talked about using flies as a volatility trade. It still involves an opinion on volatility and I am not good at assessing volatility.
Vol is easy to deal with by comparison to price - or at least easier. If I choose a stock with an IV rank of 100, what are its chances of going higher?
That's a 50% improvement over price action right off the bat. Admittedly, I've had GLD
stick at 100 for a good long while - but rolling it eventually put me in profit anyway. For a good two out of three high-IV trades that I've done, it behaved pretty much per spec.
Lest I make it sound too easy, it cost me lots of long days of study and practice, and I've spent more time feeling like an ignorant idiot - with money on the line! - than in just about anything I can remember over the course of decades. But... I'm getting there, feeling like less of one every day, and gaining in skills that I really value. I'll take that - plus the little bits of cash I've been making along the way - any time.
(Didn't mean to turn this into a book, but I guess I had a lot to say on the topic. Hope some of it is of use.
)
