Butterfly Option Trades

In a desire to restore the glory of option discussions that I once enjoyed very much at ET I shall, in light of Baron's recent efforts, be part of the solution, not the problem. So this is going to be a Journal/Open Discussion on Butterfly Option trades.

I do not trade these 100% in my account, they are one of many strategies. Therefore I will not post any running P&L because this is not all I trade. The purpose is not to impress with an ability to make money but put on real trades and open up discussion.

All my trades discussed are done in my real account, I do not vag paper trade. If pressed I can post the ToS transaction screenshot but I would rather not. I will not post size because these are scalable for whatever you want. If you are a BSD and want to do 300 FLYS...go for it. If you are a newbie and want to test the waters, do 1 FLY.

FLYs are not day traded so do not expect a new position daily and when one is put on, do not expect it to profit right away. If you are impatient or a day trader, FLYS are definitely not for you .

Anything not involved with FLYs I will discuss in chat but not here. In order to set the right tone I will ask Baron to assist me in keeping this from becoming a Chit Chat journal. All input on option trades are welcome, I am not looking to be the only one posting trades but if you post a trade you have to close the trade at some point please. Otherwise it is not fair. Anyone else is welcome. Certain people will not be welcome.

FLYS take time to profit but are a wonderful way to trade a range or bias with smaller risk than outright futures. My main focus is on futures on indexes, crude and currencies but I prefer the ones with weeklies. A small subset can be calendars.

 

I like them too. I have recently used them in options on Gold and WTI futures. I use them as directional trades. I tend to buy not sell them and keep them short term, under two weeks. Sometimes I start with a 1x2 and add the third leg later.

 

Typically how big do you trade flys in notional terms relative to your account size?

 

Leading into next week I have no FLY positions up at the moment. I am looking at ES March 2025/1975/1925 Put FLY trading at around 11.00 but still cannot decide between March 18th (March Contract) or March 25th (June Contract). Cost is same for both but spot price is different. Also Vols are low so a sell off into this bearish FLY will result in higher vols that will make it harder to get nice profit even if body is touched, which is why I am focused on theta with short term to expiration. Bottom line is whether we sell off into or after Fed and how much time to leave to expiration.

A FLY like this I keep a tight stop if the FLY drops by 25% (somewhat arbitrary as I also bail if market moves away). Will think about it into Sunday night...

 

Rob, I also prefer them directionally since the ATM spot FLY is tougher to call unless IV spikes real hard and then I look for churn. For example if ES sells off hard and IV spikes and the market settles I might go wide close to market on a FLY to see if market recovers and vols drop a little combined with short time to expiration.

I used to sell the straddle and buy the strangle later for an Iron Fly but too much risk lately. I never have legged in from a ratio but will look at it.

 

I assume this question was not for me, but I try and stay around 2% or less on these positions.

 

Hmm good question as I never picked a fixed number. I often have hovered around 5-20% but that changes depending how wide the FLY is, the cost, time to expiration.... Also I can get out of a bad FLY before it vanishes so I might go large but would never risk like 20% loss.

You will not blow out with FLYS because your max risk is fixed up front and even if market moves fast, the FLY will not go from 11.00 to 3.00 immediately, so you have time to cut and run. I have done smaller ones on crude due to higher value and bigger ones on /ES.

 

I don't often do this on purpose. But if the 1x2 moves too fast and too far but I still like the range I have set, I will buy the third leg to protect the position rather than cover.

 

IMO, it doesn't often make sense to short the backspread (1x2) in lieu of the fly, as the deep OTM wing is usually cheap ($-terms). Obviously not the case on index with the wing being a DOTM put.

 

I buy 1 and sell 2. Typically, the 1 is ATM or just OTM. When I was an option MM, I did sell 1 and buy 2 a few times but it was always a credit balance. I had to to stay with in the risk that GSEC set for us.