what is the problem of butterfly strategy ?

[momoneythansens]

Yes confirmed, that was the non-directional combo to conversion route as per Riskarb's journal.

Discussions of doing it the other way around (long wings then short body) to avoid being naked (retirement account etc.) and/or take advantage of increasing IV also took place in the context of both natural flies and time flies. No doubt this route is exceptionally difficult.

Building it directionally:

Long single + gains + short single = +exp long vertical

long vertical + gains + short vertical = +exp long fly

OR

ratio spread + gains + long single = +exp long fly

OR

...various other permutations and combinations to leg in .

Where +exp means: "positive expectancy" or attaining the fly position for less than fair value (current market prices).

Personally, favor the naked straddle + gains + long strangle = +exp long fly approach.

MoMoney.

Quote from IV_Trader:

if I remember correctly , Riskarb step's and rational building a fly were :
short the body on high nominal stock with slightly inflated IV into weekend/long weekend and few days later , buy a wings for zero/small debit.
Maybe Risk or Mo can confirm it

 

[RichardRimes]

Quote from IV_Trader:

if I remember correctly , Riskarb step's and rational building a fly were :
short the body on high nominal stock with slightly inflated IV into weekend/long weekend and few days later , buy a wings for zero/small debit.
Maybe Risk or Mo can confirm it

your right its just that I can't short calls (yet) in the ol IRA...plus the margin requirement to short first might be prohibitive in a retail acc

 

[RichardRimes]

Quote from momoneythansens:

No one can fault you for lack of creativity!

always thinking...always thinking...

 

[scoobie27]

Quote from momoneythansens:

Scoobie,


I have written about different aspects of flies on ET a bunch of times. For example:

Good luck and prosperous trading.

MoMoney.

Thanks Mo,

Will have to keep this one in my GEMs file. Have been intimidated by the complexity of the different flies for a while so have not really looked closely at them. Times have changed and I'll be adding them to my arsenal.

 

[scoobie27]

Quote from RichardRimes:

Scoobie an example of what Mo is talking about this month I :

Thanks RR,

Too much to digest :eek: After Mo's links and your example, I should start feelin pretty comfortable with these flies

These threads' real life examples are really handy to complement my readings of Mc Millan. Just what i need

Cheers

 

[blk]

Quote from momoneythansens:


As Aardvark pointed out, flies are lower probability compared to FOTM credit spreads. It is a tradeoff between risk/probability and reward. However, if you study it closer (not even that closely) you may find compelling reasons to choose a pregnant fly over a wide iron condor.

You can choose to:

1) Risk 5% of account to make 5% return on account with low probability OR
2) Risk 50% of account to make 5% return on account with high probability.

The former would be based on a fly strategy. The latter would be based on a wide iron condor strategy. Personal preference plays it's role.

Dear Mo,

Thanks for your good posts and can no one in ET can match your ability to dig out (g)old posts

EDIT: I had a couple of questions here:

1. In option 1 above, if the probability is low, then how would you actualy generate the return for the month? Am I right to assume you use some of the remaining cash in the account to trade iron flies in other underlyings, thus diversifying your risk?

2. Opening another can of worms..... how do you adjust the iron flies as the underlying moves out of the range?

Thank you.

 

[momoneythansens]

Quote from blk:


1. In option 1 above, if the probability is low, then how would you actualy generate the return for the month?

Win/loss ratio is obviously lower than higher probability trades i.e. be prepared to lose a lot more trades than you might be used to. That doesn't mean you'll lose a lot more $. If you come from a stock trading background, this should be easy to accept. If you're coming from a high probability credit spread background, it could take some getting used to.

Am I right to assume you use some of the remaining cash in the account to trade iron flies in other underlyings, thus diversifying your risk?

To be clear, the figures I used were just to illustrate the concept (more specifically, the contrast in risk between the two approaches) and not a recommendation for portfolio allocation or position sizing. Indeed, I would normally shoot for greater than 1:1 risk/reward on a pregnant fly.

Yes, if you wanted a smoother equity curve you may want to diversify across a range of tickers. The strategy is also not necessarily applicable every month. It's a tool in ideally a very large tool box.

2. Opening another can of worms..... how do you adjust the iron flies as the underlying moves out of the range?

Thank you.

Yes that is a very large can indeed. It comes down to trading. Do you think the underlying will move back? Does your initial forecast still hold? Can you improve your fly selection by being able to trade the underlying in the first place?

There are many approaches to dealing with adverse moves against a fly. The key is to have the right position size so as not to get too attached to the position when it moves against you.

Any defensive adjustments taken to try and increase the probability of the trade such as converting the fly into a condor, necessarily adds risk to the position in exchange for that probability/time. Whether you make this adjustment or not needs to be evaluated on a case by case basis.

Most often, it's just easier to close the position once a certain amount of deltas have been accumulated or the running PnL reaches a certain target i.e. a $ stop-loss.

For pregnant flies, understanding the embedded flies and/or verticals in the position can help to take risk off the table as movement occurs and time passes. This, I discussed in one of the earlier links.

Obtaining the fly in the first place for less than fair value is an additional tool to consider if it is within your risk comfort zone. Riskarb's combo to fly conversion journal detailed one method for achieving this.

Good luck!

MoMoney.

 

[blk]

Quote from momoneythansens:

Win/loss ratio is obviously lower than higher probability trades i.e. be prepared to lose a lot more trades than you might be used to. That doesn't mean you'll lose a lot more $. If you come from a stock trading background, this should be easy to accept. If you're coming from a high probability credit spread background, it could take some getting used to.

To be clear, the figures I used were just to illustrate the concept (more specifically, the contrast in risk between the two approaches) and not a recommendation for portfolio allocation or position sizing. Indeed, I would normally shoot for greater than 1:1 risk/reward on a pregnant fly.

Yes, if you wanted a smoother equity curve you may want to diversify across a range of tickers. The strategy is also not necessarily applicable every month. It's a tool in ideally a very large tool box.

Yes that is a very large can indeed. It comes down to trading. Do you think the underlying will move back? Does your initial forecast still hold? Can you improve your fly selection by being able to trade the underlying in the first place?

There are many approaches to dealing with adverse moves against a fly. The key is to have the right position size so as not to get too attached to the position when it moves against you.

Any defensive adjustments taken to try and increase the probability of the trade such as converting the fly into a condor, necessarily adds risk to the position in exchange for that probability/time. Whether you make this adjustment or not needs to be evaluated on a case by case basis.

Most often, it's just easier to close the position once a certain amount of deltas have been accumulated or the running PnL reaches a certain target i.e. a $ stop-loss.

For pregnant flies, understanding the embedded flies and/or verticals in the position can help to take risk off the table as movement occurs and time passes. This, I discussed in one of the earlier links.

Obtaining the fly in the first place for less than fair value is an additional tool to consider if it is within your risk comfort zone. Riskarb's combo to fly conversion journal detailed one method for achieving this.

Good luck!

MoMoney.

Thanks for your time and explanation. I come from the high-probability SPX FOTM credit spread background... slowly realizing the success probabilities are not that high as the delta show us and the risk/reward is bad too. Maybe its just not the market conditions (low VIX and a trending market) for these "high probability" trades.

Thanks for the link on Riskarb's thread - which has been just reinstated I guess. The problem is understanding riskarb.

There was an article on the latest OptionTrade magazine about the pregnant fly on SPX with shorts ATM and the long 1 SD away. Seemed to work well in backtesting.

Again, thanks Mo.

 

[momoneythansens]

Quote from blk:

Thanks for your time and explanation. I come from the high-probability SPX FOTM credit spread background... slowly realizing the success probabilities are not that high as the delta show us and the risk/reward is bad too.

I noted your comments on this matter on the SPX Credit Spread Trader thread. It's sounds obvious but 90% probability is not 100% probability. How do you know you didn't experience the 1 in 10 month? Perhaps even a few times in a row. Volatility says nothing about direction. Had you been on the PUT side you might now be excited about how the deltas of your spread overstated the probability!

Maybe its just not the market conditions (low VIX and a trending market) for these "high probability" trades.

Low VIX was not the issue as implied volatility went lower as the rally ensued. There was no significant volatility spike to harm the spread IIRC. The trending market was the killer. Again, it comes down to trading and being able to read the market and choose an appropriate strategy for those market conditions. I'm no expert LOL but there were no lower lows in that rally. All dips were bought convincingly.

Thanks for the link on Riskarb's thread - which has been just reinstated I guess. The problem is understanding riskarb.

This is one of his older journals. He has started 4 journals that I'm aware of. There are many explanations along the way in that journal.

There was an article on the latest OptionTrade magazine about the pregnant fly on SPX with shorts ATM and the long 1 SD away. Seemed to work well in backtesting.

I will have to have a look at it. Remember, pregnant flies are pseudo-short straddles in many respects. The wider the wings the more so. They are also short VEGA i.e. they want IV to decrease to make money. If trading pregnant flies on an index, they will be more of a (non) directional bet rather than a volatility play. Front month flies will have milder VEGA sensitivity which quickly gives way to GAMMA as expiration approaches.

Good luck.

MoMoney.

 

[blk]

Thanks for your post, Mo. Appreciate it.