I would like to trade RUT but they don't have 5-point spread. I hedged not to adjust but because Stochastics was oversold and turned up so I know there was high percentage for it to go back up. I don't buy options PUT or Call unless Stochastic tells me it's ok to do so. For example I don't expect SPX to go further than 1294 which is its last resistance and it should go back down to 1250-60.
I don't see the advantage to leggin in on the butterfly. Well, let me rephrase that. I do see that your hypothetical example would be better than just executing the full fly at once. But if you are really that good at forecasting direction, you would be better off just buying calls, selling them at a profit before the correction, and then buying puts. By legging in, there is a huge chance that you will merely increase the debit to get into the trade. Maybe so much so that finishing off the fly would provide a very improbable profit zone. Anyway, I think that the idea is great when compared to a standard fly. But it uses the exact same skills and risk management as simply buying long calls/puts. JMHO.
Legging in makes more sense on a credit vertical because it is a credit spread. If you happen to misjudge price movement a bit, you are still in a credit situation and, in Donna's case, still OTM. So the profit zone is still highly probable, you have just reduced your return. Anyway, just thinking aloud, so I might not be making any sense.
The problem was in my case I misjudged what my credit was...thinking I was already ahead I closed the 1195 then bought a 1190 for significantly less...netting only a .10 positive credit on the second 25 contracts...after a certain amt of time you really do give up too much THETA to make a good credit trade.
Yeah, time is a killer to legging into a credit spread. But I think if you are decent at forcasting price movement then it makes some sense. I just can't see any sense to legging into a debit butterfly. Simply playing long calls/puts is the same strategy with more potential profit and less complexity.
I am in the process of trying that with my SPX P 1225/50/75 March Fly. I covered the 50's at 4.80 -- too soon as the low was $4.00. If we get a decent down day I will sell them again and reduce the fly cost/end up with a credit. The risk is that the market will not turn around and what was a modest defined risk scenario has tripled in total risk until I make "another" adjustment.
What you just said make complete sense. I am buying Put right now because I feel the market will not sustain its move. I will profit from down day with the PUT or convert it to PUT spreads. I make money every month beside Spreads by buying Put or call based on market direction. The fly is one idea but I have never done any B-Fly at all. I benefit from simple Call Put or Spreads.
Thanks for the reply. Right after I posted I saw your newer post about not being able to get a 5 point spread. I like your put butterfly idea that you noted in response to Donna, hope it works out and looking forward to hearing further. Not only will I miss the market on monday, but I will not get to miss work on Monday...double whammy.