I have seen that video before (and don't want to sit through it again), but IIRC the adjustment is taking the BWB to a bog standard butterfly once it can be achieved at a net credit. Nice idea, but contingent upon getting the direction right initially with the BWB. Some profit may be locked in, but the whole open profit is not. In that sense, this is no different to any number of strategies and subsequent adjustments. You have to take a directional risk first. But let's just play that bit down, shall we? That will be $499 with the discount thanks.
maninjapan, Below is an example of locking in a profit, while still looking for more. I will be using a simple vertical spread because it is simpler, but the BWB adjustment is relatively similar and you will get the idea of how it is done from the example, I think. You start off with buying a vertical spread in the direction you think the stock is going (let's say down for purposes of our discussion). We'll set this up in GOOG (and I'm not making a recommendation to do this or not!) for purposes of our discussion. initial position: +2 480 put NOV - 2 460 put NOV This position is currently slightly out of the money, and will grow in value if GOOG drops in value by very much. Now, let's assume that GOOG drops from 485 to 460. At this point, the position will have grown a lot in value, probably from about $8 to $13 or so, depending on the time. The question is how to lock in the value without losing out on at least some of the potential gains. Here are a couple of possible actions that would be quite suitable as adjustments. 1) You could roll the puts down, selling the current spread for a profit, and buying the 460/440 spread. If you sell the two spreads you currently own, and just buy one new spread, you cannot "lose" on the GOOG position (considered overall) because the profit is being used to purchase the new spread, and you can still make further gains. 2) You could also buy the 460/480 call spread (in the same amounts as the original put spreads) which would now be worth much less than it was at the original time of purchase because of time decay, and the drop in value of the underlying stock. Then, no matter what, the combination of put and call spreads will be worth very close to $20 at expiry. Interestingly, the nature of options means that if the put spread is worth $13, the new call spread should cost about $7. So you will have spent $15 (8 at the beginning, and 7 now) and be guaranteed about $20 at expiry. At this point, you can actually play the market either way. If the market rebounds upward 25 points, you could then sell the calls for a significant gain (although I'd probably want to sell only if they were now worth $20 or more each) and still hold the puts hoping for a reverse downward again. If not, you are still guaranteed a profit. One important caveat and an example related to it: in general, adjustments are BEST made when booking PROFITS! Locking in losses often means than you are really just digging a hole that you will need to get out of eventually. As many other wise students of options have stated, the best adjustment in many cases may simply be taking a loss, or at least reducing your position, rather than exposing yourself to much more risk in the faint hope of avoiding the loss. To see this really clearly, imagine that instead of falling 25 points, GOOG had risen from 485 to 510. In that case your put spread has now declined in value from about $8 to something like $3. There is no easy adjustment with a good probability of success that will help you much. You will have lost time value that cannot be recovered, and writing other puts for NOV will work poorly (taking on significant risk) because they will all have declined in value compared to your original position. Buying calls will not be much help either because they will now be relatively costly compared to the original purchase point.
I would simply open up with a 1-3-2 butterfly+credit spread, once the credit spread is profitable, then close it out, which converts it into a 1-2-1 fly having a net credit instead of a net debit for the transaction, with the hope of even more gains if the market settles at the "sweet spot"... Of course, there's no "free lunch", as the market could go against the 1-3-2 setup... Nonetheless, this a game of RISK. Except for a few arbitrage opportunities & US Treasury Notes/Bonds, there's always risk and uncertainty associated with trading... Walt
So I just came across the video mentioned in this thread and then found this thread. I think what the guy in the video is doing is selling a vertical both sides when the underlying moves his way. You could also think of it as selling a condor. So on the CTM side he sells some of his contracts at the wing and buys and equal number at a strike farther from the money. On the FTM side he buys some more contracts at the wing strike (or anywhere really) and then sells some CTM contracts in the same number. So an example here would be start with and SPX OCT 2010 put BWB + 6 1050/-12 1010/ +6 950 215 debit/spread at this price the you can get a 380 credit for a 1050/1030 vertical and a 550 credit for a 1020/950 vertical assume price moves down about 20 points and those verticals go to 480 and 650 respectively. If you sell 3 of each you have a graph that looks a bit like the one in this video from the same guy: http://www.youtube.com/watch?v=t70DBEPaOS4&feature=related --- A few added notes: One, you could just sell the verticals on one side. Two, this is an interesting adjustment/strategy. I kind of like it and will try playing around with it since I trade BWBs anyway. Three, Lawrence MacMillan does something a bit similar with put ratio spreads on SPY or ES. But of course the BWB has more limited risk than a put ratio spread but one could start out as a put ratio and then sell the downside vertical if price moved down (thought the original spread is will likely be down more than a BWB would). There are a lot of ways to play with this. Four, spindr0 is totally correct: "RUN, DON'T WALK AWAY FROM ANYONE PITCHING SUCH ROSY GET RICH SCENARIOS LIKE THIS!" The guy on the video knows what he is doing with options. I watched some of his other videos and he talks about how people assume that calendars are long vega because the greeks on people's platform say they are but this does not account for how IV moves in different terms (vega weighting). But the fact that he gets it makes his claims even worse. There are no 5000% returns on these spreads. There can be $10 spreads in the ETFs if you only look at the risk on the cheaper side. Most importantly, the spreads he shows and claims do not have risk DO, and it is visible to anyone there on the risk graph he shows. His argument is that the market would not gap through the spread profit area without one having time to take it off. Fine, there is a high probability he is correct there. But in other videos he argues that the flash crash proves that things can "gap" intra-day and so only options are safe and not day trading. The point is he is the sort of huckster who give options education a bad name.
I thought I posted a complete reply here but it seems to have disappeared, or not yet shown up. In brief, I think he is selling verticals on both sides of his original short strike as the price moves his way. On the CTM side they are rolling his wing in and on the FTM side they are adding credit and risk. Interesting idea, but the I agree with spindr0: run away from hucksters like this who claim there is no risk when you can see the graph in front of you.
With the stock market fluctuating so much these days why not put on both bullish and bearish BWBs and lock in one win the market goes one way, then lock in the other when it goes the other way? Of course if I tried this the market wouldn't cooperate.
Somebody say BWBs? I just closed out the call side of this bad boy today for a decent profit. I put the call side on first on Aug 18 and the put side on Aug 25 for Sep expiry. Next week I'll be looking to put another on for Oct expiry.