calenderalized butterfly trade

Discussion in 'Journals' started by lotfyisis, Apr 7, 2018.

  1. 1. Choose a low beta ETF such as XLU.
    2. I am looking at 7X-10 X3 as opposed to 5x-10 X5 at or near the money long Put butterfly.
    3. Buy the wings of the butterfly as leaps ( long puts ).
    4. Sell monthly Put straddles ( the body of the butterfly ).

    Any thoughts?
     
  2. destriero

    destriero

    It's going to perform very much like a stretched calendar. You are long essentially zero gamma in the wings. IOW, you're short a fvck-ton of net-gamma.
     
  3. How about combining this strategy with the underlying i.e long XLU as well as long calenderalized butterfly puts
     
  4. destriero

    destriero

    Sure, but the wing gamma remains a problem. Best to forego the LEAPS altogether. Short bear straddle, long spot, long wings, vertically.
     
  5. I was hoping to recoup the cost of the wings by selling monthly straddles. The lower leg should be paid off after the first trade month
     
  6. Robert Morse

    Robert Morse Sponsor

    I'm not following your description. Can you provide a real example for each strike and month using XLU. Show us the spread you would enter Monday and what you expect you will do if it works well or goes against you.
     
  7. The trade will be

    Long 7 puts XLU Jan 2019 strike price $51 @$3.3 per contract
    Long 3 puts XLU Jan 2019 strike price $48 @ $1.9 per contract
    Short 10 puts XLU May 18 strike price $49 @ $.5 per contract

    Keep selling the straddles monthly. The first trade should pay for most of the cost the lower wing. If XLU kept going up and never came down, buy another far dated 7 puts at higher strike and the current upper wing will become the lower wing of your butterfly. The break even point for the first month trade will be around $46.5. In the case that the stock traded lower than $46.5, you roll out the straddle to the next month for a credit. I aiming at generating income to fund the puts of a long underlying plus long put strategy.
     
    Last edited: Apr 8, 2018
  8. Robert Morse

    Robert Morse Sponsor

    Does this back test better than just a calendar with the Jan 48 puts?
     
  9. I do not have any software for backtesting. Besides, if XLU stayed in range for 2 or 3 months, my P&L chart for long XLU and long leap XLU put is very favorable. I would think that a ratio calendar will work as well, in that case you have to sell 50% or less of the number of your leaps on a monthly basis in case it gaps down in a black swan event.
     
    Last edited: Apr 8, 2018
  10. Robert Morse

    Robert Morse Sponsor

    Where do you lose less if you are wrong and the XLU breaks up or down outside the range?
     
    #10     Apr 8, 2018