Hello Maverick and Tiki boy do I have lots to learn. Not only do I not yet understand what a simple butterfly is, but a pregant butterfly with a clipped wing and all those other adjectives sounds quite interesting. I never knew biology could be so interesting Now for the real questions: 1. You wrote that "We have the best of both worlds here, a credit spread that earns premium as long as the stock sits still and doesn't move and if it does move we then have a long gamma long vega position that could make us unlimited profits." --> So where is the risk here? Is this as risk free as the sentance makes it sound? You get money if the underlying is flat, moves up or moves down. 2. You wrote "After the front month butterfly expires, you will be losing money if the stock sits still and stops moving so you can then put on another butterfly" --> So what would be the costs to simply buy back the open positions and start all over again? Would you still have a profit?
The risk is that you believe that these are risk free positions. Yep, if the stock goes nowhere, the near month credit spread earns premium as the stock sits still. Unfortunately, the overall position loses money if it does that. But who knows? A lotta people get lucky in that their near month component behaves perfectly until it expires and then there's an ideal reversal and the far month also behaves perfectly. Uh huh. And with your being net long an outer month, IV decrease whacks you. But of course, I could have only mentioned that an increase in IV gives you more and more and more gains thereby making this position sound even better
So many guys and gals here are on top of their game and can quickly absorb the implications of complex options positions. I've looked at this strategy and while I follow it, I've opted to leave it to those who are more mentally agile than me to trade it. I can only offer the opinion of a simpleton... Mav74's "ideal strategy" requires 8 legs which takes more mental effort to manage than I am either willing or able to expend. If it works for others then my congratulations. I respect Spin, DMO, MTE, Mark and others for their quick grasp of the complex. For my own taste, 2 legs are better than 3 legs... 3 legs are better than 4 legs... and the fewer rolls the better. I don't like 4 leg Double Diagonals because of the necessity of rolling the 4 legs 2 or more times. Aside from the mental agility needed, the trader is enriching the brokers exponentially with more legs and more rolls. As far as Mav74 is concerned, he made a lot of posts that he insisted were 'educational', but in my mind were of dubious value. But hey... everyone can make their own judgements. Kind of like listening to Rush Limbaugh, there are those who think Rushs' words are gospel and who go thru life like zombies quoting Rush like 'a great iconic leader', and then there are the rest who understand that Rush is an entertainer who gets rich seducing those who prefer not to think for themselves. (Hell, that ought to stir up something!) My philosophy... KISS! In general, the fewer legs the better, and the fewer rolls the better. That still leaves the trader with significant opportunities for profit and with less complications in their trading strategies. JMO... Mech
My previous response was geared toward the proposal that Maverick's "ideal trade" was relatively risk free and would "get money if the underlying is flat, moves up or moves down." While that's true if it moves up or down the ideal amount or does a 1/2 gainer on the 12th day of odd months, other than conversions, reversals, etc., there just aren't any positions that fill your coffers with low to no risk. Come to think of it, conversions and reversals don't fill your coffers. Your opinion is on the money. Constructing a position with so many legs involves a lot of slippage and commissions. Mentally managing it is challenging and if you start adjusting legs or scalping portions of it, it mutates into something that ceases to resemble what you started out. It can then become hard to comprehend what your position represents and where you stand unless you're agile with the Greeks and you're managing it that way (which I can't). I don't know a thing about Maverick's previous posts but in all fairness, there is something to be said about positions have a risk graph that is "W" shaped with modest maximum losses in the body and a potential windfall at the wings. But with 8 legs? If this was a pre-earnings idea where one was getting some extra IV bump from the near month, I'd be more interested. But I'd look to achieve it with fewer legs (4), perhaps one of those ratioed double diagonals that you like? And thanks for the kind words
I certainly agree with the KISS principle and the potential cost of having positions with many legs. But the reason I can manage a position with 50 legs as easily as a position with 2 legs has nothing to do with any ability to juggle multiple legs in my head simultaneously. It's because I stopped trying to do so long long long ago. For me, to manage any position, regardless of its complexity, comes down to a few simple numbers - total position delta, gamma, vega and theta. It's the same for a position with 3 legs or a hundred legs. I would compare learning to manage a position this way to learning to fly a plane by instruments rather than by "eyeball." Learning to trust your instruments so you can fly safely even through fog and storm is an important step for anyone who wants to become an expert pilot, and learning to trust your "instruments" (greeks) and fly your position using them alone is a vital skill for anyone who wants to attain expert option skills. The one additional piece of info I need to know to manage my position is my net position at each strike. In other words, looking at the 90 strike for example, it is the same to me whether I am long 50 calls and short 100 puts, long 50 puts and short 100 calls, or long 500 puts and short 550 calls. In each case I am net short 50 at the 90 strike, which is all that I need to know. That information tells me whether I will be getting longer premium (gamma and vega) or shorter premium as the underlying moves up or down. I also treat positions in different months as separate positions. That's particularly true of options on futures positions, where the underlying in each month is truly a separate contract that can move quite differently from the other months.
A complex reply for sure... but I understand what you are saying even though I would personally get 'bumfuzzeled' trying to figure out the necessary adjustments to make on a seriously multi-legged, multi-month position based on the greeks. Don't know that I'll ever (or ever want to) achieve the level of mental agility needed to do that. A metaphor that I actually apply is in playing Blackjack. About 8 out of 10 trips I make to the casino, I leave with a profit (along with a free room and meals). The profits I make easily exceed the losses that I incur the other 20% of the time. But here is the conundrum... when playing blackjack, the dealers have learned to 'count' each players cards instinctively on the fly so quickly that it boggles my mind how they are able to tell each player the value of their hand 'real-time', even with the dual value of the Aces and with split-hands. I've asked the various dealers what training they received that taught them how to do such rapid card counting, and they all tell me that it is not 'taught', but is rather an 'acquired skill' that they have honed over a period of years. Even though I will probably never acquire that rapid card counting skill, I am still able to successfully play blackjack strategy, just a little slower that the dealers might be used to. Same thing applies to options trading... I keep it simple enough for my own personal ability to manage the complexity of the positions I take on (most of the time . Regards, Mech
A potential problem with this strategy is the fact that there's a strong possibility of being pinned at expiration, or having only a short leg exercised while ITM, plus having the long wings expire OTM... What can you say... No Free Lunch...
In terms of the overall position, a very large move up or down is the ideal result, letting the extra wings come into play. In terms of the near month, the ideal expiration is a pin at expiration because that means you collect almost the full value of the front month butterfly.
Hey DMO, Sorry to Quote you a 2nd time, but there was something familiar about your comments about managing complex options position(s) by greeks. A couple of months ago I stumbled across a website where the operator promoted the concept of spending 10 or 15 minutes each morning to 'analyze' his portfolio of his option positions by the greeks. He was promoting the concept that the greeks were the simple key to his success in managing his portfolio, and his tone was very similar to your post, indicating that the portfolio greeks were the key. But as I recall, the guy wanted about $100 per month from you to join his "inner circle group" for it to be worth his time to share his techniques. While 'flying a plane by instruments' is a little beyond 'Flying 101", would you be willing to share a little more about Greek Management? If you are willing to discuss this, it probably should merit its' own thread. Mech
exactly, very good points. I am claiming the same: First, most of the complexer equity options strategies have a very limited payoff while you need to be spot on with your view to realize expected value. Even if you protect the wings what if the US or UK gets suddenly downgraded, what happens when a terrorist attack occurs? You want to trade out of all the 4-6+ legs, that at the same time, with minimal slippage, and tight spreads? Come on that is laughable. The very limited payoffs just dont make it worthwhile to bear such risk , especially any of those credit plays. Let me explain why I think so: On one side, you have institutional and professional hedge fund players. NOBODY, repeat nobody, is putting on some 8 leg positions in order to meet their p&l targets of their options book. The simple reason is manageability. I have seen index options traders striking it stinky rich simply expressing views on vols, trading some calendars, some put or call spreads but that was it. In between the occasional broker arb. I have never seen a guy who made any satisfactory amount of money trading butterflies or credit spreads. In my opinion 95% of those guys who now declare such strategies the new holy grail are failures: a) traders: Most of those guys started trading stocks and lost, moved on to futures and lost, got their feet wet in fx and lost, and now for lack of testability and accountability they think options trading is the right field for them. Interesting as options trading is traditionally the most complex asset class in terms of risk management and hedge adjustments. b) brokers: They love guys who trade multi leg positions as they earn the spread each and every single time, free money, free lunch, of course they push such strategies although they have so far failed to provide one reliable back test of such strategies. Nothing. Just words... c) people who love to talk but never walk the talk: Those guys never made a single penny trading and have for years populated the boards and try to "educate" everyone on subjects they fail to understand themselves. Sure, they understand the theoretical stuff but utterly fail to see why it wont work when putting such trades on over time. They wrote journals, books, made tapes, and all kinds of snake oil products. Now they try to convince everyone how credit spreads or butterfly are limited risk but the road to riches. What a joke. I continue to claim: Those who cannot trade a simple trend on either stocks, fx, futures, those who fail to see we are sometimes in a range bound environment where reversals pay off and at other times buying on dips in the direction of the longer term trend pays WILL UTTERLY fail to trade mentioned option strategies. Period. If you cant trade a simple positions why would you ever succeed playing a multi-leg options strategy? By the way, if you are one of the few who have an edge trading trend or reversals or both, then you would never ever look such option strategies again because you will figure out you can limit risk in much cheaper and easier ways with larger potential payoffs. Just my 2 cents but please go on...