Hey everyone I thought I would make a whole thread dedicated to the butterfly spread! I have some questions and what better way to learn than by asking the shmucks on ET!!!! I currently have a butterfly a 121 butterfly on spx 2590,2640,2690. EXP 27 April. Purchesed for 18.88, currently trading for 21.15. Where should one be looking to take profits from it. Also where should I be looking to stop? Is delta hedging in the question when trading the fly?
it is up to you silly.. what you want and how you design the trade is very subjective how do you (re)evaluate your trade? you may need some kind of measures.. what do you see and expect to see? (then vs now vs future) is anything changed? is the change still within your expectation? the shape, the adjustment, the hedge should serve your ongoing objectives and it is best if designed beforehand.. :]
Ride it to expiration or take your stop at 2590 or 2690 if reached. It's only money you're risking, so don't worry about it. <grin>. This ET shmuck is curious why you are virtually day trading flys? With your short options almost at the money with two trading days to go, wouldn't you want to capture that net theta decay? Compare the risk profile and break even points of this position and simply shorting the 2640 straddle. Although a reasonable default R/R here might be 1:1 for better profit probability. After all, it looks like you are not adverse to trading these things quickly and hopefully would have the discipline to take a stop loss. Personally, I would only pay 5 to 6 points for a fly like this, obviously many weeks ago, and be looking to exit at 15 to 18 if that target was reached. Even better might be to trade the underlying and create a delta neutral short option hedge. This would, however, require more margin and management. Ultimately, the path to worthwhile profits is taking on risk, either with a possible statistical edge as in a short index straddle or with exceptional trading skills along with consistent and appropiate money management as well as not getting in the habit of risking $18.88 and when up $2.27 looking to take profits.
Not my kind of trade, but I've done enough of them in the past year or so to recognize a good, balanced, soundly-based set of trading protocols when I see it. So, FWIW and all, "Nice post." Glad to read a thoughtful post.
Thanks for the insightful post. I took off the trade this morning for 22.18 (don't kill me). You make a lot of sense here, I am looking for a candidate to buy a 1 month butterfly on, and will keep it delta neutral. Butterflies don't accumulate that much delta because the gamma is pretty low so I won't need to hedge as often as a short straddle. Once stock breaks strike take off the trade? From experience is this always the better trade? Do you ever think to just keep hedging your deltas? Thanks.
Actually have not traded butterflys in a while. What I used to do was enter at a premium of about 10% of maximum profit potential, during times of high implied probability, and "forget" about the trade until a couple of weeks before expiration. Because I tended to favor a direction on a 1-2-1, I paid a lot for my long out of the money option in premium as measured by the increased implied volatility compared to my short options. This reduced my profit expectation. For example, my long option would be slightly out of the money, my short options would be further out of the money, and my last leg would be very far out of the money. Although I nailed a 30 year t-bond expiration perfectly one time, overall, my results were middling and prefer more hands on type of trades. On a month long butterfly, it is likely for one of the legs of the strike to be taken out at least briefly. My philosophy would be to size my investment such that the loss of the entire premium would not be too large of a percentage of my account. With two weeks or less to go, if the all the legs of the butterfly were significantly in or out of the money, I would close the position and take whatever net premium remained. You can keep hedging your deltas or actively trade each part of the butterfly according to apparent high probability technicals. In addition, it's important to anticipate potential changes in volatility. For example, if you see a divergence between ATR and implied volatility, that would be worthy of further investigation. Where this divergence manifests itself into a trend change of volatility or the price of the underlying, you have increased potential of a nice trade, either outright or less hedged. Take the time to deeply explore outright short options, short straddles, vertical spreads, ratio spreads, overwrites, 2-3-1's, 4-5-1's, and volatility ETFs. Back testing is truly your friend here. The great thing about options is one's ability to closely match a trade with a specific scenario. The more exact your forecast of time and price, the greater your R/R can be. Today's narrower option spreads and commissions have created reasonable opportunities for knowledgeable retail traders.
What have you replaced the strat with OR why did you stop trading them? Any people/books/articles I read on trading butterflies? In regards to back testing where do you get your data from? Thanks again for the great response
maximum pain, what do you think about buying an ATM butterfly but trading it like 2 seperate positions ( the short straddle) and long strangle? Then just delta hedge accordingly
If you are looking to capture theta decay and are willing to manage deltas, why not trade the underlying and sell options for a delta neutral position? I don't like butterflys because I'm paying theta decay on my long legs. I would prefer to manage a short straddle with two or so weeks until expiration and legging in and out according to "obvious" technical and statistical based considerations. I don't necessarily maintain close delta neutrality based on my assessment of market conditions. I don't always short premium, especially in a low volatility environment. I take into consideration my outlook for volatility as well as my outlook for the underlying before creating a trading plan. If you are looking for a position that does not require active management, buy a cheap fly, say 4 to 6 weeks out, and hold to or near maturity. To directly answer your question, you have a fine idea. For a consistently disciplined trader who has greater risk tolerance and time to actively manage their position, there may be better, more profitable alternatives as mentioned previously. There are several ways to look at return on investment. One may be knowledge gained per units of time spent. Hopefully I gave you some good ideas for you to consider and that your return of knowledge per units of time spent was high in this thread. An even better return on your time investment will be your own broad based research and back testing. You know the particulars of your own situation, I do not. The way you see the financial markets is unique and only you will ultimately be able to match your trading system accordingly for good overall profitability. Do your homework and get paid. Best wishes to your trading.
For me personally, butterflies have kinda been the holy grail. Having said that, I have never simply purchased a midpoint fly and waited for a target. I started there, like everyone else - then I went through the same path as others that have gotten deep into the strategy. As it moves you want to further limit risk while exposing additional profitability. As max has said, consider time frames, ratios and additional spreads that limit downside and enhance the profitability chart. If this type of trading suits your personality and you spend the time to develop the techniques around the butterfly, the rewards can be quite significant.