Benysl, honestly I would never put on a position in an index if I had no idea where I thought or wanted it to go. So I think the discussion here is moot. If one trades options you MUST have a view on either direction or volatility and synthetically they are the same thing. You cannot be AGNOSTIC. I hear guys who do this all the time and in my experience, they never make money. God knows we have had 100's of guys go through my prop firm with that kind of mentality. Not a one of them is still with us. I just want you to understand that it's hard for me to analyze what you want me to analyze without consideration of implied volatility or direction. Complexity is not the issue here, edge is. Sure, all things being equal simpler is better.
hi meverick74, sincerely thank for your advise. I appreciate every post you take and taken yoru time to explain to a newbie. I am sure many come and go at your prop firm, my goal is to try to stay as long as I can in the trade till the day I die. for me i use simple tools to determine a uptrend stochatics overbot oversold,. if it is a uptrend i start selling high premium call or spread at the same time load some put spread below for some pull back. of course it is still a net short position, so some night i couldn't sleep and busy adjusting left and right, haha that is options trader life, putting on is easy as ABC, adjusting is will be the real job,
Well, now that I looked at it, with the teeny DOTM puts for tail risk, it does look like a weird butterfly... Unlimited risk is a no-no for me and my old age. I'll play with the DOTM puts and strikes weird fly though. Thanks a lot!. Honest thanks. Atticus had also suggested flies in that thread to me...so I'll seriously study them now.
Providing some relief, an overlay of empirical market distribution with it's peekedness and fat tails implies the bottom troughs of the "W" are less likely to occur than a normal distribution suggests while the middle peak and wings are more likely to occur than normal suggests. see Option Market Making by Baird JDM
Hey guys, This is a seemingly great thread, but is the position a joke? Could somebody explain me how one pays with 2 atm bflys for 2 atm backspreads? Am I missing something in the simulation below? Thanks.
Your theta is killing the position and your vega is too rich. Not enough short premium in the front month. The OP's description is concept, not prescription. The general idea is sound, although on an index you'll likely not need to be net long calls. On an individual equity, yes, but not on an index.
Well, but in order to short enough premium in the atm fm flys, you would either need an inverted vertical IV skew (never seen that happen) and/or farther otm long strikes in the bm backratio (then the risk gaps get quite wide and the probability of profit goes rapidly down). Still waiting for a realistic position simulation on real numbers. Concepts are cool and stuff, but I just don't see it in this position. Thanks. Luci
You do know this thread is 9 years old right? LOL. One of the problems with bringing up old threads is not seeing the context by which this thread was created. It was created along with a bunch of other threads that dealt with basic option theory. It was not a "recommended" position. The position was actually taken directly out of Allan Baird's book called "option market making". He was describing the basic structure that market makers, not retail traders, tried to emulate. In general, market makers tend to be short vol in the front month and long vol in the back. That position could take 100 different shapes. This was just an example. Again, the thread is dated 2003.
Glad it was brought up again. I didn't notice it much before. There's a few 9 year old gems in there. The position hardly matters, although I use such structures on the flanks. LOL. Isn't that the truth.