Synthetic flies using intraday underlying and binaries.

Discussion in 'Options' started by EliteThink, Aug 4, 2015.

  1. Covered calls, buy writes, delta neutral trading in very short time frames.

    Some don't know it, but traders on Nadex can sell premium against an underlying position on Nadex which expire in short time frames, and these can be set up any day of the week. Instead of a covered call once a month, they can be set up once an hour repeatedly.

    Here is an example of a winning trade last Friday:

    One thing I have not seen covered are synthetic butterflies for currencies on Nadex, which is a way to collect time premium on currency contracts with a duration of 20 hours or more.

    Here is the trade:
    Buy: USD/JPY Daily 3pm spread @123.60
    Sell 2: USD/JPY 124.20 3pm binaries @14

    20 hour trade duration
    Margin for this trade is $370
    Max profit for the trade is $88 (24%)
    Profitability zone: 123.32-124.20
    Since the daily atr is .56, the profitability zone is nearly .90 points. This is a sizable profit zone with an elevated win rate.

    If the binary strike is hit, close the binaries for a loss (-72 for both), and close the long spread for a gain (+60). (almost delta neutral into the barrier, and apex stop loss can be used)
    if USD/JPY falls, prob set a stop at 123.00 or so for a max loss of 32 or so.
    Trade is profitable with no underlying movement.

    Using vanilla options we are able to set up butterflies to collect premium. Nadex enables us to accomplish this with binaries on commodities, currencies and indices etc. For some reason, nadex will not allow flies on currency contracts longer than 8 hours in duration. This is a work around.

    Sometimes the ratio is 1:1, 1:2 or more. There are endless combinations to set these up, if of interest. However, these synthetic butterflies have a max profit point at the binary, instead of being at center strike, like normal flies. For that reason it is prudent to attempt to lean into the trend.

    'Hope it helps.

    deltastrike likes this.