I think that you'll find that doing a 2:3 instead of a 1:2 buy/write (months out) won't make much of a difference if there's a large down move but when you compare the higher decay rate of the 1 month put versus the somewhat lower delta of the 3 month call (compared to the 2 month call in the other position) you'll find that with the 2:3 you give up some of the upside and in return you'll have not quite as bad a result if the UL goes nowhere. It's pick your poison price EDIT: That reads really poorly (g). The 1:2 does worse if the UL goes nowhere but does much better to the upside. That's your tradeoff.
I won't argue the point because the risk graphs are very different. Ignoring the complications of IV change, an iron condor or ratioed IC (more insurance on the wings), aka an RIC, is going to make more b/t the strikes than a DBWB. So yes, a better risk/reward. But a move toward the wings takes you into negative territory first followed by a recovery or even a profit if there's a really big move. What intrigues me about the DBWB (or even a plain, balanced double butterfly) is that a move to the wings takes you into positive territory first before heading south so in the absence of a monstrous gap, you have the chance to profit first.
There's an Optonetics article on "The lazy Stock Collar" where AAPL experienced a 13% decline in a 5 month period (from $70.29/sh to $60.72/sh); however, the trader was able to yield an increase of 4%. That's an annualized return of 10%. This was a standard collar, not a calendar collar. The objective was to enter a new collar position at the expiration of the existing collar position. The author mentioned that it's called the "lazy" collar because he's only trading once a month at or near expiration. He mentioned that he "left so much money on the table that any professional trader would be embarrassed to claim that he did the trade as described. Many multiples of what was made could have been actualized had it been done correctly." In other words, it seems that he could have made about 20% annualized if he was more aggressive instead of being "lazy". An interesting aspect of this strategy is the fact that the author rarely tried to roll his positions. Instead the loss in stock value was offset with an increase in the short call & long put. The money gained from the options that often expired worthless was used to increase the size of the stock positions. I suppose that a good "rule of thumb" is to roll the collar only under the following two conditions: (1) the max profit is reached & (2) the cost of rolling to the next month is less than the current month max profit . Otherwise, it may be best to realize the profit and start over. In other words, since a collar is equivalent to a bull call spread, if it's at max profit, then close-out and start over; otherwise, let options expire at max loss and use the gains from the option positions to buy additional shares of stock, then set up a new collar position.
Btw... a 10% or 20% annualized return on capital is typically better than the s&p; however, the return can grow exponentially beyond 10% or 20% with futures and commodities. This is what makes this strategy so fasinating to me...
Walt, in a good month, a broken or double broken butterfly managed nicely in a cooperative market ( and I realize that won't happen all that often, but it probably will happen at least once per year) will yield that percentage (10%+) or much more in a month, as well as generating profits (1-3%) in most of the other months. There will be only modest losses possibly once or twice a year. Spin's point of how the risk graph is oriented is very, very important. Ratioed wings must go through the loss zone before the profit zone. BWB's go through the profit zone first. This means you can take a decent profit way more often. You can also use various spreads to separate the profit zone from the loss zone and capture even more of the potential profits if you're careful. Time decay also works for you with BWB's, but not with the ratioed wings. In other words, if the market stalls in its advance or decline, it won't hurt you. You will still capture the time decay related to the written options. Since BWB's are usually set for a credit, the net time decay helps out even if the market does nothing. Spin, I'll have to play with a real life example to see if you are correct about the drop not being profitable for the calendar collar. I agree that with modest drops (less than 10%), you will lose with calendar collars, although the loss will be modest. Buying the second month put for a noticeably higher price than the first time around simply guarantees the certainty of a final loss because your outlay for the puts will be greater than the cash obtained for the sold call. If the market moves up 10%, you should do well with the calendar collar because you can buy the second put much more cheaply than the first leading to a net credit for the options and a guaranteed final value. However, it is doubtful whether you would make more than 3-5% in two months unless you play for various swings.
I must be missing something. The gain from capturing the put premium plus the gain on the put won't offset all of the stock loss. It's a slow losing battle as the UL declines. A collar is equivalent to a vertical so I wonder how one could do up to 5 consecutive monthly bullish verticals, have the underlying decline almost $10 and make money... unless one is reinvesting the put and call gains, increasing the size of the stock position and getting a good close on the last month's collar (near the upper strike). Rolling isn't problematic unless the underlying has risen significantly above the call strike. Although the ideal collar is one placed near the lower strike that finishes at the upper strike, anything initiated b/t the strikes won't be significantly worse. So even if the UL is 1-2 pts ITM, the process can continue.
One of the challenges I have with the Double Broken Wing Butterfly is the fact that the break-even range is a fraction of the break-even range of a short strangle with ratio backspread wings FOTM. With a short strangle, the likelihood of a profit is better because it can handle a wider range of whipsaw than a DBWB. Another major issue with DBWB is the fact that it requires 6 legs. My broker, IB, does not allow for 6 legs simultaneously. Therefore, I would need to do the call legs, then the put legs, or visa versa. Nonetheless, I concur that the DBWB strategy is is a viable one with positive expectancy, especially when the market is range bound. The more I think about it, the more I'm inclined to simply enter into a vertical spread, which is the synthetic equivalent of a collar. Many believe that a credit spread is better than a debit spread because there may not be a need to close-out a winning position, just let it expire. Nonetheless, the put/call parity shows that is really a matter of personal preference. To keep things simple, bull put spreads at support and bear call spreads at resistance, with the willingness to roll up to three consecutive periods may be the best bet overall for trading collar equivalents... K.I.S.S. Walt