The Perfect Option position

[Maverick74]

Quote from eudaemon:

What do you suggest if one expects a sharp large move from a certain point in time or price, but with lot more likelyhood of being down than up?.

With up more likely than down, I know your answer already as call backspreads, that are open ended on the upside.

Thanks.

I would do the front spread. Live with the risk.

 

[Maverick74]

Quote from benysl:

ok let start some demo position by the way I do trade options for a few years, Thou not as knowledgable but good enough to make some cookie money.

Let say index at 100, I have no 0 clue where market is going. I do not know if the index will even go up or down. No idea.

I can construct a typical out of money spread pay some money .
put side
buy 1 95 P
Sell 2 90 P
buy 1 85 P

call side
buy 1 105
sell 2 110
buy 1 115

it is easy to see the above breakeven point for the typical butterfly. As it is a debit so the index must move inside the range to stay profitable if it stay 95 - 105 this position lose money


so let try a broken wing butterfly it can be done with a credit or debit, in this case we talk about credit of $10 or $20 to cover commission
buy 1 95 put
sell 2 90 Put
buy 1 75 put

buy 1 105 call
sell 2 110 call
buy 1 125 call

now we have a wide range of profit, with the index of 100. we have a profit 85 - 115 range. and home run will be hit at 95 to 85 or 105 to 115. At 95 to 105 it is a breakeven trade.

would that be good?


a more complex broken wing will be as below. I explain the call side but the sceneraio apply to both side
buy 1 105 call
sell 2 115 call
buy 1 120 call
this is done with a debit let say 2 point debit. As the market goes up close the 105 call and buy the 115 call for at least more than 2 points, this result in a free trade on the call side. What if the market never go up, then the market is going down then you convert your put side into a free trade. Now we have a call bwb that we spend 2 points on so to cover this 2 point we can sell some spread above or below to collect.

I would prefer the last spread, is it complex?

Benysl, honestly I would never put on a position in an index if I had no idea where I thought or wanted it to go. So I think the discussion here is moot. If one trades options you MUST have a view on either direction or volatility and synthetically they are the same thing. You cannot be AGNOSTIC. I hear guys who do this all the time and in my experience, they never make money. God knows we have had 100's of guys go through my prop firm with that kind of mentality. Not a one of them is still with us.

I just want you to understand that it's hard for me to analyze what you want me to analyze without consideration of implied volatility or direction. Complexity is not the issue here, edge is. Sure, all things being equal simpler is better.

 

[benysl]

Quote from Maverick74:

Benysl, honestly I would never put on a position in an index if I had no idea where I thought or wanted it to go. So I think the discussion here is moot. If one trades options you MUST have a view on either direction or volatility and synthetically they are the same thing. You cannot be AGNOSTIC. I hear guys who do this all the time and in my experience, they never make money. God knows we have had 100's of guys go through my prop firm with that kind of mentality. Not a one of them is still with us.

I just want you to understand that it's hard for me to analyze what you want me to analyze without consideration of implied volatility or direction. Complexity is not the issue here, edge is. Sure, all things being equal simpler is better.

hi meverick74, sincerely thank for your advise. I appreciate every post you take and taken yoru time to explain to a newbie. I am sure many come and go at your prop firm, my goal is to try to stay as long as I can in the trade till the day I die.

for me i use simple tools to determine a uptrend stochatics overbot oversold,. if it is a uptrend i start selling high premium call or spread at the same time load some put spread below for some pull back. of course it is still a net short position, so some night i couldn't sleep and busy adjusting left and right, haha that is options trader life, putting on is easy as ABC, adjusting is will be the real job,

 

[eudaemon]

Quote from Maverick74:

I would do the front spread. Live with the risk.

Well, now that I looked at it, with the teeny DOTM puts for tail risk, it does look like a weird butterfly...

Unlimited risk is a no-no for me and my old age. I'll play with the DOTM puts and strikes weird fly though.

Thanks a lot!. Honest thanks. Atticus had also suggested flies in that thread to me...so I'll seriously study them now.

 

[jdm]

Quote from benysl:

...

The position will suffer if it go up or down slowly at the 105 or 95 level where the front month butterfly hit max loss and the back month spread long leg is ATM. The back month may or may not have a profit depending on IV at that time. But let do the maths, what is the probabilty that stock remain at 100 (very slim), stock remain at 97 - 103 (quite high where you earn some premium from front month). Stock shoot below 90 or above 110 (slim), stock at 95 - 97 or 103 -105 (pretty high).

...

Providing some relief, an overlay of empirical market distribution with it's peekedness and fat tails implies the bottom troughs of the "W" are less likely to occur than a normal distribution suggests while the middle peak and wings are more likely to occur than normal suggests. see Option Market Making by Baird

JDM

 

[Luciferius]

Quote from Maverick74:

Tiki, I am going to declare you the winner! Although I didn't even think of using the butterfly strikes so wide although you could do that on the front month.

Basically what I had was a butterfly on the front month which would be done for a credit.

+1 put @ 95
-1 call @ 100
-1 put @ 100
+1 call @ 105

This gives you your typical butterfly that will carry positive theta at the 100 strike and around it while also limiting your losses to the outer strikes. So with the butterfly would want the stock to sit still and not move which in and of itself is a good strategy for many.

So then we add a WRANGLE!!!!! That's right someone mentioned this earlier on the back month which is also a form of a backspread. However, we sell the 100 strikes yet again to keep our credit. So....

+2 put @ 95
-1 put @ 100
-1 call @ 100
+2 calls @ 105

Long Wrangle!

What this does is it's basically a backspread that will give us long vega and long gamma exposure should the stock take off or collapse.

So when you put the spread together, you start off delta neutral, theta positive, and no vega exposure. You will be earning time premium and hope that the stock just sits there. However if the stock starts to move, you will still be making money during the front month no matter what. If the stock really moves hard then the position will turn into a long gamma, long vega position in which your theta will go negative. However you can also let your deltas run or you can gamma scalp them. After the front month butterfly expires, you will be losing money if the stock sits still and stops moving so you can then put on another butterfly. At expiration on the back month you will have a range where you will lose money after only a moderate move in the stock. But if the stock either sits still or breaks one way or the other you have unlimited profits. We have the best of both worlds here, a credit spread that earns premium as long as the stock sits still and doesn't move and if it does move we then have a long gamma long vega position that could make us unlimited profits. Hence a very very versatile strategy. If you put enough of these on, you could really spread your risk out. Of course you can always alter the strikes to change your profit range. By widening the strikes on the front month butterfly like Tiki did you reduce your profits slightly but increase your odds of making money during the front month.

Thank you for everyone who participated. I hope everyone here learned something. I think this is ET at it's best. Hopefully we can continue this option dialogue on many other option threads.

Again, congratulations to Tiki! Give yourself a cookie. LOL.

Hey guys,

This is a seemingly great thread, but is the position a joke?

Could somebody explain me how one pays with 2 atm bflys for 2 atm backspreads?

Am I missing something in the simulation below?

Thanks.

 

[sonoma]

Quote from Luciferius:

Hey guys,

This is a seemingly great thread, but is the position a joke?

Could somebody explain me how one pays with 2 atm bflys for 2 atm backspreads?

Am I missing something in the simulation below?

Thanks.

Your theta is killing the position and your vega is too rich. Not enough short premium in the front month. The OP's description is concept, not prescription. The general idea is sound, although on an index you'll likely not need to be net long calls. On an individual equity, yes, but not on an index.

 

[Luciferius]

Quote from sonoma:

Your theta is killing the position and your vega is too rich. Not enough short premium in the front month. The OP's description is concept, not prescription. The general idea is sound, although on an index you'll likely not need to be net long calls. On an individual equity, yes, but not on an index.

Well, but in order to short enough premium in the atm fm flys, you would either need an inverted vertical IV skew (never seen that happen) and/or farther otm long strikes in the bm backratio (then the risk gaps get quite wide and the probability of profit goes rapidly down).

Still waiting for a realistic position simulation on real numbers. Concepts are cool and stuff, but I just don't see it in this position.

Thanks.

Luci

 

[Maverick74]

Quote from Luciferius:

Well, but in order to short enough premium in the atm fm flys, you would either need an inverted vertical IV skew (never seen that happen) and/or farther otm long strikes in the bm backratio (then the risk gaps get quite wide and the probability of profit goes rapidly down).

Still waiting for a realistic position simulation on real numbers. Concepts are cool and stuff, but I just don't see it in this position.

Thanks.

Luci

You do know this thread is 9 years old right? LOL. One of the problems with bringing up old threads is not seeing the context by which this thread was created. It was created along with a bunch of other threads that dealt with basic option theory. It was not a "recommended" position. The position was actually taken directly out of Allan Baird's book called "option market making". He was describing the basic structure that market makers, not retail traders, tried to emulate. In general, market makers tend to be short vol in the front month and long vol in the back. That position could take 100 different shapes. This was just an example. Again, the thread is dated 2003.

 

[donnap]

Quote from Maverick74:

You do know this thread is 9 years old right? LOL.

Glad it was brought up again. I didn't notice it much before. There's a few 9 year old gems in there.

The position hardly matters, although I use such structures on the flanks.

Quote from Maverick74:

You cannot be AGNOSTIC.

LOL. Isn't that the truth.