OK. I back off my opinion. I thought he concentrates so much on equivalents (important to a good understanding of options - no argument there), that his stuff was not of practical use. I retract. Mark
Sorry if I gave the impression I wouldn't like (to discuss) butterflies. Of course I do, who doesn't like a nice butterfly . The reason for my urging you to read up on flies and synthetics is that I have the feeling that you are groping for some magic formula or spread that will somehow be more profitable than another. There isn't one. All spreads are just modifications to adjust the risk to your own tastes. For the rest you get exactly what you pay for. So, I apologize if I seemed to discourage you from exploring this field. So, why would you like to own a butterfly? Ursa..
Yip, you are of a rare species that will accept that fact without seeing it explained black-on-white. It is exactly this awareness that makes so many questions seem moot. Point taken, thanks, Ursa..
No, he goes a lot deeper than that. It's just that this synth stuff is so fundamental and keeps coming back that I mentioned it. Anyway, I still don't really understand what you mean by 'practical use'. I think the day-to-day thing about option trading is thinking about strategies and adjustments. After that it's just selling and buying, but that's not much to read a book about, is there? Maybe I'm missing something here? Ursa..
So, 4q, maybe it is time for you to create a new thread on butterflies. I for one would like to see more of that discussion from you.
Ursa, generally I like the long butterfly (the OTM variety) for the following reasons: 1) Cheap...further away the body is from the strike price of the body, the lower the net debit. The maximum risk is the net debit. 2) They operate independently of any other positions you have open. No reason one couldn't have a February Fly with certain strike prices and a March Fly with different strike prices. 3) With a truly balanced butterfly (not talking about that Broken Wing Butterfly some people love), there is no option requirement cash holdback beyond the opening net debit. This is a very important criteria. 4) They work with just about any stock. With an ATM butterfly, one would look for a high IV skew. With an OTM butterfly one would look for a low IV skew. 5) I have a full time business hence my trading time is somewhat limited. With an OTM butterfly, I can "set it...and forget it". 6) They serve as an excellent hedge as protection against an open position. 7) They can be adjusted from time to time; however, this gets complicated. 8) One can build a Butterfly one leg at a time and over time. If things fall right, it is possible to turn it into a risk free trade. (If not completely risk free, at least to a low miniscule amount.) See my posting this morning in the "Reverse Collar" thread. The above 8 items are those which quickly come to mind. I would appreciate feedback here; however, I would hope that we could stay away from comparing the Butterfly to something else. If a particular Butterfly configuration makes sense, it makes sense irrespective of what else one might do or not do. In that regard, as I said above, they are totally independent. I know that some would say that the Butterfly is no good because it only Maxes out at expiration and only at a specific price. That is absolutely true. I never look to hold my Butterflies to expiration. If there is any interest in this subject, we can discuss exit strategies separately. Bob
I have a typing mistake in (1), above. What I intended to say is that the further the strike price of the body leg is from the present price of the underlying stock, the lower is the net debit. (This is something I picked up about a year ago, while sitting in Border's Book Shop perusing one of Larry McMillan's books.) Since then, I have looked at a lot of option chains and I feel that this is a generally true statement.
Hi Bob, I'm not an expert in butterflies perse, but I will give my views anyway. Cheap is such a relative thing. Compared to what? To make any kind of profit you will need to do a lot of them and then they're not so cheap anymore. As said, any option position gives you exactly what you pay for. The R/R is build in the pricing structure and can merely be remoddeled by choosing different legs. In a sense, they are all the same and thus all equally expensive. You can optimize and look which options give you the most delta for the money, or the least gamma for the theta, But that is all fixed when doing a butterfly. So, I don't think butterflies are cheap. It's like saying there are cheap stock. There aren't. Why would that be not the case? I think I miss your point here. Every position, indeed every leg of every position and every combination of legs from different positions is to be seen as an independant position. Eg. Your FEB and MAR butterfly together form 3 (diagonal) calendars. 2 long and 2 short. The fly itself is a bull and a bear vertical combined etc etc.. Yes, the fact that the risk is known (and thus the marrgin requirement fixed) is the most important advantage of butterflies. I don't know much about skew. Maybe you can explain how you profit from skew with a butterfly. True, but this goes for almost any long (debit) option position. Too general, for me. Any position can be used as a hedge against other (opposite) positions. A long put is a good hedge against long stock, but might just as well buy a call proper. Again, that is not an advantage of butterflies since it can be done to any position. There are a few, mostly interesting threads about this subject, about 6 months ago, i think. Also, the magnificent Riskarb for a while build 'free' Iron Fly's this way. He beared the full risk for a naked straddle and once it became even with the wings he bought those. He then opened new naked straddles. So, in short, the main advantage is it's known and limited risk. The other points I just don't see. I would urge you to get the 'cheap' idea out of your head. Ursa..
Ursa, thanks for your posting. Looking back at my item #1, I should have used the term "low net debit" as opposed to "cheap". On second thought, maybe I should not have done the damn posting to begin with. The whole point in #1 is that you have to go out in price to reduce the opening net debit. And if one is going out in price, it is necessary to allow time for the stock to move into the profit zone. This and many other responses I have received in this thread and elsewhere have me discouraged to the point where I have decided to either not post any more or if I do, only in rare occasions and only in a limited response to a limited issue. The only real value of my entire posting is item 8, which didn't get any comments. Everyone seems to want to express whether they agree with what I say and whether there is a different way of accomplishing something. But seldom, if ever, does anyone ever come up with a specific suggestion. Now I know why. Because the only thing a specific alternative suggestion would accomplish would be to give the others something new to take a shot at. There are always alternatives. There always will be. My alternative is to wish everyone well and get the hell out of here. Bye Y'all.
QQQQ, cheer up man. Taking pot shots at people's ideas is the ET way. You should've picked up on it by now and not take things here seriously. For all you know, these guys are trading options during their break from selling sandwiches at the deli shop across the CBOE. What ursa was implying is that there is absolutely no edge or advantage in doing any of the option strats known to man. Infact, it is guaranteed to lose money regardless of a strat under a random entry/exit system. I understand that Optionetics teach alot of this and is precisely the reason why they get alot of bad rep over here or anywhere else where "serious" traders post. You just have to sift through all the ad hominem attacks LOL Regarding your number #8. Yes, this is perhaps the most valuable potential of the fly, the ability to build it for "free" or a "credit". However, what you must realize is that it isnt risk free per se as you are exchanging a portion of your positive expectancy(current +PnL) if not all of it for potentially a bigger reward down the road. It is a trade off and the decision to lock a +expectancy fly or simply offset should not be based on whether there is risk in it relative to premium at entry but on whether your forecast going forward is in line with the characteristics of the fly you are adjusting into. There is always going to be risk to any position over current fairval. For many it is hard to distinguish but it is an important thing to consider nonetheless.