what is the problem of butterfly strategy ?

[scoobie27]

Quote from vedanta:

Please excuse me as this is probably a very dumb question

I am searching an income producung strategy where strikes will bw far out of the money -put strategy- and where market starts falling the margin requirement will not fluctuate very much.
In May I had positions which were still out of the money but I ran out of the margin and had to close the positions at a loss.

Will butterfly strategy meet this requirement. I mostly use options on futures indexes.

Thanks

Hi Im no expert but I think you might want to look at a thread called SPX Credit Spread Trader

Its by optioncoach

Your margin requirements will not fluctuate if its a credit spread.. calls or put spread. But you still have to manage you risk and know when to close. Check that thread out. Its a great one

CHeers

 

[momoneythansens]

Vedanta,

Bad luck on the loss. Unfortunately, you are one of many people I have heard of that suffered losses for May.

Were your PUT positions naked? If so, the first step is possibly to think about limiting the risk by buying a further out of the money long PUT to result in what is known as a credit spread.

If you are using futures options then the margin for credit spreads will still vary depending on 1 day's perceived risk as calculated by the relevant exchange.

In that case, it is wise to maintain the neccessary margin to cover the full loss on the spread regardless of whether you are required to by your broker/exchange or not. The maximum loss on a credit spread is fixed and known at point of initiation of the spread unlike a naked PUT.

Alternatively, you should possibly look at taking evasive manouvers when your position looks like it is coming under threat e.g. long PUTs at higher strikes. The combined risk on the position will then be looked at for margin purposes.

All of the above has been discussed in detail on the SPX Credit Spread thread.

In summary, it sounds like you were overleveraged on your position and perhaps need to come up with some risk management tools to deal with your positions. You may also be undercapitalized to trade effectively.

A butterfly is a limited risk position with known maximum loss at initiation, however, for futures options, margin requirements will still vary depending on strike selection etc. the strategy like any other is not neccessarily better depending on the circumstances.

Good luck!

MoMoney.

Quote from vedanta:

Please excuse me as this is probably a very dumb question

I am searching an income producung strategy where strikes will bw far out of the money -put strategy- and where market starts falling the margin requirement will not fluctuate very much.
In May I had positions which were still out of the money but I ran out of the margin and had to close the positions at a loss.

Will butterfly strategy meet this requirement. I mostly use options on futures indexes.

Thanks

 

[vedanta]

Quote from momoneythansens:

Vedanta,

Bad luck on the loss. Unfortunately, you are one of many people I have heard of that suffered losses for May.

Were your PUT positions naked? If so, the first step is possibly to think about limiting the risk by buying a further out of the money long PUT to result in what is known as a credit spread.

If you are using futures options then the margin for credit spreads will still vary depending on 1 day's perceived risk as calculated by the relevant exchange.

In that case, it is wise to maintain the neccessary margin to cover the full loss on the spread regardless of whether you are required to by your broker/exchange or not. The maximum loss on a credit spread is fixed and known at point of initiation of the spread unlike a naked PUT.

Alternatively, you should possibly look at taking evasive manouvers when your position looks like it is coming under threat e.g. long PUTs at higher strikes. The combined risk on the position will then be looked at for margin purposes.

All of the above has been discussed in detail on the SPX Credit Spread thread.

In summary, it sounds like you were overleveraged on your position and perhaps need to come up with some risk management tools to deal with your positions. You may also be undercapitalized to trade effectively.

A butterfly is a limited risk position with known maximum loss at initiation, however, for futures options, margin requirements will still vary depending on strike selection etc. the strategy like any other is not neccessarily better depending on the circumstances.

Good luck!

MoMoney.

Thanks so much MO

 

[momoneythansens]

Scoobie,

Yes, I am big fan of flies. Especially pregnant flies (example dissection of a pregnant fly)

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

http://www.elitetrader.com/vb/showthread.php?s=&postid=1083263#post1083263
http://www.elitetrader.com/vb/showthread.php?s=&postid=1099977#post1099977
http://www.elitetrader.com/vb/showthread.php?s=&postid=1068693#post1068693

However, I doubt most of what I have to say on the matter contains any original thought over and above the rainforest load of paper that Riskarb has dedicated to the subject.

Expiration to expiration in recent months, using a (pregnant) fly for a mean reversion/rangebound strategy on indexes has been worthwhile. They are also good fun on individual equities. You might want to look for situations where a big move has occurred and things look like they might settle down into expiration etc.

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.

Combining the two is certainly feasible (using the iron condor to pay for the fly) however, you will be exposing yourself to very large risk should you encounter a trending market IMO.

Naturally, you also have the option of diagonalizing to tailor vega exposure and gain roll opportunities.

Good luck and prosperous trading.

MoMoney.

Quote from scoobie27:

Yeah the risk return does seem quite nice. Cant lose to much but can gain a lot : ) But trying predict the underlying and get it to fall very near the atm stirke or body is the key to striking gold. But I think as long as it falls anywhere between the two long strikes or wings, Im not doing too badly. The bigger the range the easier : ) Won't get rich but at lease breaking even or making some small change. Then I can mix this with Coach's stratetgies (conservatively ) to pay for these butterflies. Using this strategy with rally's range market might yield good results. You explained the concept very clearly a few posts back but didn't mention if you liked this strategy. Can I assume you like it ?

Once again, many thanks Mo and risk

 

[RichardRimes]

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

6/20 BTO 1600/1625 call spread on NDX
for 7.20 (debt)...no margin required reason NDX appeared very oversold and I thought it would revert up... it did so

6/30 STO 1625/1675 call Credit spread creating a pg B-fly (because it is pg margin is required) credit was 8.25

had I chosen to sell the 1625/1650 I would have reduced my debt substantially and had no margin requirement...however I would have needed strong bias to think NDX would end up between 1600-1625 by Jul exp (and I didn't) finally on..

7/6 I Sold the 1600 and rolled to 1650 for a credit of 6.20 so right now have

-2 NDX at 1625
+1 NDX at 1650
+1 NDX at 1675

the reason I didn't roll for a simple vertical CS of 1625/1675 was the hugh margin requirement.

today I'm trying to close 1 NDX 1625/1650 CS for debt of .35 (mark is .30) just to release margin.

so basically I started with a debt vertical spread...converted to a pg B-fly then finally to a credit spread...based on the market swings and my bias

 

[RichardRimes]

Last month for JUNE exp I tried to develop a B-fly by buying the wings when vols were high...ooops and selling body when vols were low...double oooops..as it also was an OTM B-fly it went down in flames!! These things are NOT easy:eek:

 

[IV_Trader]

Quote from RichardRimes:

Last month for JUNE exp I tried to develop a B-fly by buying the wings when vols were high...ooops and selling body when vols were low...double oooops..as it also was an OTM B-fly it went down in flames!! These things are NOT easy:eek:

not easy because its two separate stand along trades , you have to be right on variable ( vols in your case)

 

[RichardRimes]

Quote from IV_Trader:

not easy because its two separate stand along trades , you have to be right on variable ( vols in your case)

Exactly right...unfortunately I figured it out in hindsight building a B-fly with verticals is much better strategy and I think I knew that just didn't do it!

 

[momoneythansens]

No one can fault you for lack of creativity!

Quote from RichardRimes:

Exactly right...unfortunately I figured it out in hindsight building a B-fly with verticals is much better strategy and I think I knew that just didn't do it!

 

[IV_Trader]

Quote from RichardRimes:

Exactly right...unfortunately I figured it out in hindsight building a B-fly with verticals is much better strategy and I think I knew that just didn't do it!

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