I have seen an article where backtesting shows that delta hedged short straddles are profitable in the long run. I wondered if anyone has experience trading butterflies and delta hedging at the end of each day, and if that is profitable?
look at the front page: butterfly system; best stop system; association proposal; bread butter; etc... every week it's the same thing - the quest for the holy grail that doesn't exist.....
I'm no expert but from the delta neutral trading I've done (on the retail level), it comes down to your ability to hedge as well as a cooperative underlying. Timing is everything. Luck doesn't hurt either.
Assuming you are short straddles/long Flys,you should ask yourself why you are delta hedging. If you run a short vol/gamma book one is obviously delta hedging so the 2 standard + move doesnt send you the way of the dinosaur. The other reason is to hopefully extract the differential between implied vol and "realised" vol. Obviously,if you sell a straddle at 24 Vol,you feel the realised vol should be much lower.Its a pure bet,and if you are correct,you will be rewarded.With a butterfly,your greeks are tame relative to the straddle,hence its not as pure a vol play as the short straddle. You can certainly delta hedge a fly,but in order to bank the same coin,you will have to trade much larger.It really comes down to your comfort levels.Would you rather be short 1 straddle or long 5 flys(approximation).. I personally dont sell straadles in this VIX enviorment,but I do trade Flys
if you did this for each individual name, commission-wise you would create a very complex structure to extract a minimal reward. On the other hand, if the delta hedge was on your entire book and you had many flies in different positions then it would make sense. I read many journals where people once in a while bought spy/spx to hedge their book, and usually only when delta went beyond a certain limit threshold.