Let's suppose that I have a 1-3-2 call fly with still a lot of time to go for it (>40-50 DTE). The stock went up and now I'm in the situation where the longs went up quite a bit, and the short down almost by the same amount. I put this figure on because the skew in that moment looked particularly favorable, however being a fly it won't show any impressive P&L until the last few weeks, so I could be sitting on this for very long time. What I'm tempted to do now is to sell the outer 2 calls, the rationale being that 1)I expect the stock staying in this same range for a while, and 2)short premium received + profit from selling the calls could be a sufficient buffer even for a prolonged move upwards. What I would like to ask to the community is if any of you is already doing this kind of play, and if you do, what kind of rule do you use to determine if it's worth a try? For instance comparing with the breakeven point of the ATM straddle, or according to the distribution probability?
I'm sure the resident 1-3-2 fly experts will give you more specifics, but the obvious thing that comes to my mind is - margin. When you close the 2 outer longs, you will be left with 2 net short calls - this will give risen to a lot of margin. Make sure your account can handle this requirement. It's not something that I would do, due to the undefined risk on the upside. I like my sleep, and no longer possess the cohones of steel which I once did, to engage in uncovered option writing. But to each his own, and if you accept the risks, then do as you see fit. Oh, and if this is on individual stocks, keep an eye out on earnings announcements dates. You definitely don't want to be holding naked options during that period. Good luck.
I play in the Chinese market, actually the rules here are a bit strange. No matter if your risk is defined or undefined, you still have the same margin requirement for shorts, so nothing changes for me by removing two longs. And I'm on an ETF. In any case the point of my question is exactly this: we all know that by selling the two longs you get undefined risk yada yada yada.. but I would like to know what kind of metrics people use to define whether this risk is worth taking or not.
I am not aware of anyone trades flies with such long expiration (>50 days). Any rationale for doing that? I have been studying flies for a long time, done tons of simulation on SPY and haven't found a good strategy yet (except for very short expiration trades). Thanks.
I'm far from an expert on flies, but I do have some comments from a more general perspective. I'd say that the risk is secondary to the trade decision you're making. A fly is designed to perform in a specific manner in specific market conditions - i.e., you had a direction and a price movement in mind when you opened the trade (at least I hope you did.) A naked short call is used for a totally different situation. If your concept for the trade has changed materially, and changing over to a naked call is what is best overall, then that's obviously the right thing to do. However, if it has not, then changing the structure of the trade would be a bad idea. Talking yourself into accepting the resulting negative effects just because you want one piece out of the whole structure... not great. It's also worth noting that the overall result of doing this would perforce be negative: since the value of your shorts is equal to your longs, the loss in your remaining trade will be equal to the "profit" you take, for an overall balance of zero. However, you will now also have a far riskier trade left on the board. To me, adjustments are supposed to produce an improvement in the end result. This seems like it would accomplish the opposite.
I'm quite chuffed to hear that my (so far) short and rather amateur bit of research into flies has resulted in much the same perspective as yours. I've had some reasonable success with IFs in my IRA account, but can't claim to understand them well... if you have any reading recommendations, I'd certainly appreciate them.
Hey, I am just a mom & pop amateur retail that is why it takes a long time for me to get anything done. Everything has to be learned first hand. Studying flies a long time doesn't mean I have a very good understanding of how to make money trading them. Here is my dilemma on flies: 1. If I mechanically put on an ATM fly, I will net about zero minus commission/slippage as my counter parties will assure me of that due to probability and pricing. 2. So, I need to have an opinion and my opinion has to be more correct than my counter parties for me to come out ahead. 3. If my opinion is so good to out smart my counter parties, I might as well go directional and take advantage of convexity. Tell me what is wrong with me? The pros on ET talked about using flies as a volatility trade. It still involves an opinion on volatility and I am not good at assessing volatility.
Welcome to the jungle, @ironchef - I'm at the same place as you are. The light at the end of the tunnel is that practice plus intelligence result in efficiency... or it could just be the oncoming train. I guess we'll find out! You may be taking the numbers too seriously. Seriously. Also, assuming that you're going to do anything "mechanically" - vs. using your smarts and learned skills - is a losing strategy, and not worth assuming. Sure, statistically the total expectancy of trading is zero - or, as you note, less. That's a lovely concept, and useful in some ways. But waiting for some statistical bogeyman to come and rob me of everything I've made so far (I wonder how he's going to get back all the money I've spent, the food I ate, etc.?) is a waste of my time; I've got trading to do, interesting things to learn, and so on. It's also worth considering the distribution of profits and losses within the trading population: who the hell says that every trader must eventually lose his shirt? As the old joke goes, you don't have to outrun the bear - just the other guy (who, in this case, happens to be half of all the traders in the world. I'm willing to take that bet.) I.e., assuming that you're going to lose is not particularly useful - and anybody who claims that improving your trading skills is not a net positive is so full of shit that his eyes are brown and muddy. Now, assuming you're pickin' up what I'm a-layin' down... Flies, from my (small) experience and based on what I've learned so far, aren't just about direction; they're also about timing. They're not comparable to going purely directional, because the price moving too far (or too soon) in a fly trade will land you in negative P&L. Your opinion in opening one does not have to be "more right" than anyone else's; it just has to be right for the market - which no one can predict with any certainty (and thus be "right" ahead of time on.) If you do, say, a skip-strike put butterfly for a small credit, and the price ends up above your body strike, you will make that credit, end of story. If the price goes below the body strike, you have additional time/strike distance to adjust it; if it goes below your break-even, you can adjust, or accept stock, or make other decisions. Averages - which is what MMs and such have on their side - be damned; each trade stands or falls on its own, and that is something where statistics cannot apply. (I'll note that I've never lost money trading flies yet. In fact, of the several hundred live trades I have taken since I started, more than 90% have resulted in gains, only a small percentage have been actual losses, and only two have been of any meaningful size (nothing comparable to the total gains.) And I'm still in my first year of trading options.) Vol is easy to deal with by comparison to price - or at least easier. If I choose a stock with an IV rank of 100, what are its chances of going higher? That's a 50% improvement over price action right off the bat. Admittedly, I've had GLD stick at 100 for a good long while - but rolling it eventually put me in profit anyway. For a good two out of three high-IV trades that I've done, it behaved pretty much per spec. Lest I make it sound too easy, it cost me lots of long days of study and practice, and I've spent more time feeling like an ignorant idiot - with money on the line! - than in just about anything I can remember over the course of decades. But... I'm getting there, feeling like less of one every day, and gaining in skills that I really value. I'll take that - plus the little bits of cash I've been making along the way - any time. (Didn't mean to turn this into a book, but I guess I had a lot to say on the topic. Hope some of it is of use. )