What's a good return/risk ratio for long butterflies?

I agree with you and my single biggest loss(mark)came in AAPL when sticky Delta went out the window and I lost money on the upside despite being pretty long..

I dont model it but I am l aware of
its potential effect..

It's a factor I consider when choosing which fly structure to put on..


got st
LM3886 said:
I see. How do you model the residual vol change in addition to sticky Delta? I find it very challenging because given the same underlying movement, the vol change is quite random at different times and in different stocks. Sticky Delta seems to be a rough approximation only.
More...
 
It is an acceptable ratio but it is not a surety that the return will be higher only. The market has been inconsistent in the past as well so it may take a dip too. But the probability is more for good returns.
 
3:7 OTM

4:6, 5:5 ATM

depends on many a factor, but that’s what I’m eyeing.

ratio’s are illusory. Manage the fly at a predetermined profit/stop in relation to a percentage of the total terminal P/L.
 
I wouldnt say ratios are illusory if you compare apples to apples,i.e different structures with "similar" strikes/risk reward metrics...

As an example when deciding between a 1x3x2 vs a 1x2x1 and a split strike "similar fly",you can go all Greek or you can simply look at the risk reward ratios,which is 95 percent how I measure which fly to put on( or calander/diag)...The more you trade fly structures,the less dependent on Greeks one becomes and simple arithmetic takes over..

If you put on the structure with the "best" ratio,odds are you chose the fly with the best risk reward metrics ,which ultimately translates to trading the skew most efficiently and having sexy greeks.And who doesnt like a sexy Greek :)

Thats the beauty of structures with limited risk and clearly defined payouts.
 
You must log in or register to reply here.
Back
Top