what is the problem of butterfly strategy ?

Discussion in 'Options' started by hermit_trader, Dec 10, 2005.

  1. fh2000


    Trying to bring back an old thread about butterflies. I found it difficult to get reward/risk less than 3:1 ratio for a long butterfly that is < than 45 days till expiry if I trade non-directional.

    Riskarb, in order to get 5 or 6:1 reward/risk, do you trade directional on these flies, meaning your "body" strike is off of the current price, a little? More than a little?

    #41     Jul 9, 2006
  2. Thanks for bringing this thread to life. I've been trying to "do" B-fly's on the cheap (on the NDX) with mixed success. I was rather shocked to find out that they are actually low probability/low risk/ high reward trades. I just prefer the high probability/low reward trades. However when vol's are higher then it does seem that B-flies do make sense....bump.....
    #42     Jul 9, 2006
  3. 2 cents:

    It depends what underlying you are trading. On broad-based indexes under current volatilities you won't find 5:1. You need to look at individual equities.

    Higher IV = cheaper fly = better risk/reward = lower probability

    They are all inter-linked for obvious reasons and is a matter of tradeoffs.

    If the underlying is more volatile it's less likely to be where you want to be isn't it?! The less likely the underlying is going to be where you want it to be, the cheaper your bet will cost!

    The delta neutral fly will be most expensive and increasingly so as expiration nears, so trading a fly away from neutrality will cost less.

    IMO, trading a significantly OTM fly is a bad idea unless the intention is deliberately for a lottery ticket.

    Riskarb will be along to make it all clearer...


    #43     Jul 9, 2006
  4. Flies carrying significant deltas are usually edging into long gamma. Completely useless in all but index markets where the distro encompasses many strikes.

    Perhaps the best application is a neutral fly into high vols/high confidence scenarios in which a short straddle involves too much regT margin. IOW, you want to trade 100 short straddles but can't afford the vig -- so you buy 500 flies.
    #44     Jul 9, 2006
  5. HI Mo, Risk,

    Really dumb question but when you say butterflies do you mean eg.

    GOOG ~ 420

    Therefore I would put on

    Buy 1 430C
    Sell 2 440C
    Buy 1 450C

    Sorry but just making sure im fully understanding the position we're talking about.

    #45     Jul 10, 2006
  6. Hi Mo, just looking at after hours SPX quotes on OX and it seems one can get 5:1 or better. Here are the numbers

    SPX ~ 1265

    Buy 1 1275C 8.2 8.3 8.25 -8.25
    Sell 2 1285c 4.2 5.0 4.60 9.2
    Buy 1 1295c 1.9 2.5 2.2 -2.2

    Therefore there a net debit of 1.25 and the r/r in this case is 10/1.25 or 1:8

    But then i priced 1270 1280 1290 butterfly and the r/r is 1:4.75.

    I guess it depends on strike selection ? or am i totallly off the mark?
    #46     Jul 10, 2006
  7. Yes, you're correct. I was talking complete garbage. Stuck on super-pregnant flies.

    #47     Jul 10, 2006
  8. That's an OTM fly. ATM would be 410/420/430

    PUTS,CALLS,IRON varieties with same strikes are all synthetically equivalent.

    FWIW: Earnings coming up on GOOG. Flies want IV to decrease.


    #48     Jul 10, 2006
  9. vedanta


    Please excuse me as this is probably a very dumb question

    I am searching an income producung strategy where strikes will bw far out of the money -put strategy- and where market starts falling the margin requirement will not fluctuate very much.
    In May I had positions which were still out of the money but I ran out of the margin and had to close the positions at a loss.

    Will butterfly strategy meet this requirement. I mostly use options on futures indexes.

    #49     Jul 10, 2006

  10. Yeah the risk return does seem quite nice. Cant lose to much but can gain a lot : ) But trying predict the underlying and get it to fall very near the atm stirke or body is the key to striking gold. But I think as long as it falls anywhere between the two long strikes or wings, Im not doing too badly. The bigger the range the easier : ) Won't get rich but at lease breaking even or making some small change. Then I can mix this with Coach's stratetgies (conservatively ) to pay for these butterflies. Using this strategy with rally's range market might yield good results. You explained the concept very clearly a few posts back but didn't mention if you liked this strategy. Can I assume you like it ?:D

    Once again, many thanks Mo and risk
    #50     Jul 10, 2006