Hello, For those who trade butterflies style positions on indexes : I read that many traders "sell the meat" and are long the wings with more contracts on the wings. My question is : do you buy few more strangles than straddles or do you buy more put only as the risk is I guess more on the dowside? And do you buy the supplementary contracts more OTM or all at same strikes? Thanks in advance for your advices
There is no right or wrong way of doing this. Some people buy further OTM, others buy more contracts at the same strikes, yet others may do a combination of both. It's up to you to decide which method is more comfortable for you, and the best way to find out is to try it yourself, either with real money or on paper. This way you will get a feel for how the various positions behave.
It's an IF/THEN answer. If you buy more protection then you risk less but make less. If the protection is further OTM, it costs less but protects less. If you buy only puts but the call side gets into trouble, then... The gist of it is that add'l protective legs enable you to tailor the risk graph more to you liking, shifting the P&L up, down or middle.
in major volatile days, like the weeks before/after lehman, i think sell the gut while load more wings is a good play. But not in most cases. Just sum up your greeks from the combo and look at the p&l chart. All those strategies are nothing more than different ways to capture a market based on your prediction. If you predict rain, bring an umbrella, if you predict snow, wear boots. Even if you used the right strategy it doesnt mean your prediction is right...