Butterfly Calendars

Discussion in 'Options' started by erol, Sep 21, 2009.

  1. erol


    I was toying again with TOS analyze page,

    and since I'm into butterflies at the moment (paper trading them) I thought of using an opposing butterfly trade in the next month to hedge my risk against a violent move


    XYZ @ 50

    Long XYZ Nov put 45/50/55 butterfly
    Short XYZ Dec put 45/50/55 butterfly

    So at your extremes you can do this for a small debit or credit(maybe??) your max risk is similar to the long butterfly and reward is similar as well (I think it's slightly less)

    Aside from the atrociously high commissions on this, anyone see any problem with this strategy?

    Is there a synthetic equivalent that can reduce the number of legs?

    I tried this with a condor as well... it gave me a risk profile that resembled batman or something. no joke!

    thanks for your help.
  2. erol--
    interesting thought, but...
    I don't see it as much of a hedge short term against a violent move in either direction. You might get lucky and get it for next to no cost, but there will probably be a modest net debit due to slippage and the structure of butterfly risks (Charles Cottle explains it superbly in his books).

    Now, think about what might happen if XYZ plummets to 30. What does that do for your long butterfly? You only make money if you are between 45 and 55, and max out at 50. So November is a loser in this scenario. December is a "winner" (and only if it stays down), but you spent all your credit from the Decembers to buy November, so it doesn't do you any good.

    If the opposite happens, and XYZ goes to 70, you aren't any better off.

    For this to work, you want the stock to stay put for November pinning at 50, and then move away hard in December, which is a bit odd, and it could pay off incredibly well in that situation.

    Make sure you factor in the margin before you try to trade this. Being short in December will mean margin comes into play.
  3. spindr0


    During the life of the near term long butterfly, the far short month butterfly will not attain anywhere near it's maximum loss at the central strike (premium retention) but will come close to its maximum gain with a violent move outside the wings.

    That means is that during the life of the near month butterfly, your peak profit at the center won't be diminished a lot and your loss outside the wings will be reduced. This is all good only AT ner term expiration AT/NEAR the center strike.

    Unfortunately, almost any time before expiration, you'll have very little profit or loss anywhere on your risk graph and due to the large amt of slippage on 6 legs, you're going to have a high probability of a loser. For these reasons, I don't like this position and the following suggestion doesn't make it likeable, only a bit less dislikeable :)

    If you're looking to control the wings, forget the 2nd month butterfly. Perhaps for every 5five (?) 45/50/55 long Nov butterflyies, by 1 OTM strangle. It could be a 45p/55c or 40p/60c and could be for either Nov or dec, depending on what you like in the risk graph. It's still almost as many legs but it's far less slippage.
  4. erol


    thanks to both of you for your feedback!