Delta Neutral Trading - Condors etc.

sails said:

Yes, something like that - and it had to be cheap. It does need strong moves to work well. I'm not completely convinced it is a good way to go, but it was fun trying it out. Certainly way too expensive in the Oz market with fees. It's not a set and forget as one needs to be watching to make adjustments.

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Yep, way too expensive for Oz market. Like your set ups though, have tried modelling simmilar & always ends up as a croc spread (eating up the spread dueto fees)

mazzatelli1000 said:

Have you ever come across skip striking the flies to have yet another configuration of the "M" spread (hehe)

e.g. 170/175/180 put fly --- +2/-3/+1
180/185/190 call fly --- +1/-3/+2

The characteristics are like that of a condor.

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mine look more like batman. I have the backspreads without the single strangles, would pick them up later if needed for protection.

mazzatelli1000 said:

Cutz
I have software that accepts numerous legs and products. But the software is catered towards other markets.

I think Hoadley has the Open Positions module that lets you enter numerous legs.

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as does optionsoracle. Not as good as hoadleys, but a free modeller nevertheless.

Beenjammin said:

Great stuff Grinder, many thanks.

Can you please explain a little more on "adjust into different sepcies"? Are you referring to different strategies, different underlyings, something else?

Thanks

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different bird species can be BWB, butterflys or others... & different strategies can be other adjustments. Start of with a version of an IC but could end up with just about anything as the market moves, backspreads, strangles, even switch to a long condor if my view changes.

mazzatelli1000 said:

Thanks for sharing your management of that position with us!!!

I especially like the bit about selling the flies in between when the market is tanking.

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I have never shared it simply because I'm not convinced it's a good thing to do - especially in Oz because of the fees. But it was a lot of fun - until I realised how much I had run up in fees!

I have been running a few simulations of it and I seem to be getting a negative vega, positive theta creature which is fairly delta neutral at the start. The position I suggested above seems to favour drops in IV All of which is the opposite of what you have described LOL
The only thing that seems to reconcile is that skew to the downside is favourable

I think I am looking at a different configuration to yours!!

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Yes, I think you may have it a bit different. Nothing wrong in yours - after all it's all just about trading puts and calls.

As an example, I had one of these on in the Oz market about Jan last year in BHP. I positioned the flies as follows: the longs were $2 apart and the shorts $1 from the longs. Going my memory now (could look up my records if you would like more exact info), I think I had about three long flies with two debit spreads on each end and the debit spreads were joined on to the upper and lower flies.

BHP came tumbling down a day or two before expiry and I had reason to believe it might have reversed to go up into expiry - which it did. Unfortunately, the MMs refused to put any quotes up on the board all day on the day of the reversal, apparently because they didn't like the volatility. I had never had this happen before, so was somewhat unprepared. I tried to add the put credit spread on underneath, but the MMs wouldn't take the other side at my prices. Below a certain credit, it's not worth the risk should the market continue to fall.

Needless to say, I decided to quit the Oz options market and proceeded to set up with TOS. I found NDX worked well with the system, but with things getting very busy on the home front, I had to stop. These sorts of positions need adjustments at the right times, so it didn't work to have the market trading while I slept. Neither did I want to be woken in the night due to the pressures happening during the day time in Oz.

Looking back on the BHP trade, I realised that the real profit actually came from the put credit spread when it looked like BHP was reversing to move up into expiry. In hindsight, I could have simply put the credit put spread on and purchased a cheap bull call spread a little higher. So much cheaper in fees, and less investment to protect. I think the fees for that month were in excess of $1000. That is simply too much to pay for a limited profit position.

Have you ever come across skip striking the flies to have yet another configuration of the "M" spread (hehe)

e.g. 170/175/180 put fly --- +2/-3/+1
180/185/190 call fly --- +1/-3/+2

The characteristics are like that of a condor.

Click to expand...

Also similar is the broken wing butterflies - normal quantity as a normal fly, but the OTM wing is taken even further OTM - I think we have discussed the similarities before. Doubled up they become aka Batman spreads? Some of this sort of thing is discussed a bit on the Yahoo Option BWBs and Collars group. Michael Catolico is one of the contributors and is an ex US market maker. His mock trades are interesting to follow, but due to the number of adjustments - hopeless for the Oz market. With the ASX charge of $1.12 per contract in ADDITION to brokers fees - it's pretty hopeless. Not to mention the MMs that won't put up quotes until somewhere in the first hour - or the slippage often incurred in the Oz Market. Sorry - end of rant.

Actually, wouldn't do the butterflies I describe above with IB either due to assignment risk with some shorts going ITM and they give so little time to re-adjust the position.

I have also traded some diagonals and long line, multi strike calendars with extra wings. These type of calendars work wonders if IV rises a bit, but easy to lose money quickly if IV falls.

Diagonals are an interesting set-up. I did quite a large one of these in the first twelve months or so of my option trading on NCP now (NWS). Put it on just before Murdoch decided to take the company to the US. It rocketed up Being so new at it, I decided to close out - it was Thursday morning before the Easter weekend and the MMs obviously sensed I was a bit desperate so didn't get a good fill on the exit. Anyway, followed the trade through with "what-ifs" and actually found that if I had kept rolling the short call up and out, the position would have still returned a profit. But then with the frenzy of the move, I think IV would have remained farily high which would have helped as well. Didn't understand much about the greeks at that stage!

mazzatelli1000 said:

Hey Cutz,
Just back for Easter

E.g. 170/175/185/190 Condor
Assume 5pt strike increments

Code:

Strikes
170      175     180    185    190
+1      -2      +1                      Butterfly 1: 170/175/180  
          +1     -2      +1              Butterfly 2: 175/180/185  
                 +1     -2      +1      Butterfly 3: 180/185/190  

+1        -1      0      -1      +1     Total: Add down = 110/115/125/130 Condor

Butterflies have maximum profit at middle strikes/apex with very little time to expiration
If the prices are attractive enough, you could sell off a butterfly and take money off the table/lock in profits
E.g. hits XYZ $175 sell off the 170/175/180 fly

XYZ could tank from here, but you have reduced the loss/or book a small profit
If it moves back up to $180, you could sell off the 175/180/185 fly

In hindsight it would be better to leave the condor untouched if it comes back into the 180 range

Just another way to manage

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Hi mazza

Just referring to this earlier post concerning fly’s

Are you talking about placing each of the fly’s individually and if so are they bought at the same time or as the market moves

Or is the condor at the bottom the position that can be placed in it own entirety and would this in effect be the same position

Looking at it some of the strikes seem to cancel each other out

Would the individual trades allow more scope for adjusting even though incurring higher broker fees to place?

Thanks
Gary

essentially models the condor, but allows you to migate the risk by taking off positions the underlying moves. In Oz embedded bflys will eat up your position with all the fees involved in adjustments. Go to this link http://www.riskdoctor.com/ will keep you busy.

I'll also have a go Gary,

Please correct me if i'm wrong anyone,


The butterflies are put on in one hit, after dissection the risk profile looks like a IC.
Because the butterfly has it's max profit zone at the strike (after some time has passed of course) you close out each butterfly as the strikes are visited.

There is no point to putting all those flies on where some of the trades will simply cancel each other out. The broker, the ACH and MMs will love your donation of fees and slippage, but you will technically end up with the condor as the card-up shows. It is one the advantages of carding up positions so you don't pay unnecessary fees.

In my version of Iress (as is the case with IB) you don't buy or sell to open or close. A sell simply cancels a buy and vice versa. Same deal as with stocks or futures. Why some brokers complicate issues with always adding "to open" or "to close" is beyond me.

Even if your broker allows an open buy and sell on the same strike/month - what's the purpose? They will move together.

There are many different strategies that have embedded positions. The diagonal is another - it is actually a calendar spread + a credit spread where the front month long of the credit spread is on the same strike as the short of the calendar. That might help to put it into perspective...

OK I see how I’m totally wrong with initiating the position as multiple butterflies. So in theory you start off with a multi contract condor and remove butterflies as time goes by ?

Not something I’d consider doing on the oz market but when you look at options on SPY in the US with spreads only a few points apart it seems like an interesting concept.

Yeah, have to agree with you sails regarding buy to open ect. on the comsec order pad, i know i shouldn't blame my broker but that has been a cause of to many order entry errors.
On the other hand TWS and it's 3 click system i haven’t had any problems, its a thing of beauty.

thanks guys for all your replies

i am currently reading in cottles book about the structure of butterflys and carding them up but sometimes takes a few readings before it starts to make sense

i see all of these strategys as a combination of buys and sells (no greek speak ) with the ability to weight towards the position where you may speculate the price is going to head

any thoughts on long fly over wider strikes eg. xjo 3500;3700;3900

costs more to put on but has a wider profit zone 3500;3900

gary

sorry that profit zone
would be aprox 3600/3800 not



costs more to put on but has a wider profit zone 3500;3900

Hi Gary,

I'll leave that to the experts as i've never put on a butterfly (yet) but personally a more attractive range of strikes would be a few levels down, i think you may also have to consider market outlook and it seems like we're long overdue for a correction. (Note;personal opinion only i'm more than likely to be wrong ).

Which leads me to another question, you guys that put on flys, do you consider market outlook or are strikes set based on IV and probability of loss zones touched based on standard distribution the day the position is put on ?

cutz said:

Hi Gary,

I'll leave that to the experts as i've never put on a butterfly (yet) but personally a more attractive range of strikes would be a few levels down, i think you may also have to consider market outlook and it seems like we're long overdue for a correction. (Note;personal opinion only i'm more than likely to be wrong ).

Which leads me to another question, you guys that put on flys, do you consider market outlook or are strikes set based on IV and probability of loss zones touched based on standard distribution the day the position is put on ?

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thanks cutz

those strikes are just chosen at random as an example
not actually looking for pointers on direction of market as such.

have not placed any flys either but am looking into as the profit potential is attractive if finishing at sold strike

trying to widen my strategy's from just naked puts and bull put spreads.

Gary, I haven't had a look at your specific butterfly - bit busy now so will have a look later. Anyway, here's a few quick ideas on butterflies -

Butterflies can be used as bullish if placed above and bearish if placed below and are cheaper if they are placed OTM. If they are narrow, they rarely make much profit prior to expiry. With something like BHP, a fair bit of premium stays in the ATM options even on expiry day, so it can make butterflies very frustrating. Although, if they are wider, it do produce profit a little closer than at closer strikes.

Butterflies can also be adjusted quite easily. They can be moved entirely or one of more of the legs can be moved. Sometimes one can morph into a butterfly from a losing long call to lower the breakeven without adding significantly to the debit.

I did post somewhere the way I have used them recently - but was was technically running a reasonable line of short butterflies during times of volatility and adjusting them as the market moved.

I'm reluctant to do them in the Oz market any more due to the hefty fees and slippage here which eats too heavily into their limited profit margin.

I have heard that some like to place a wide butterfly with the lowest long leg ATM and the sell legs higher (often where IV is higher) as a bullish position and it is helped by falling IV as well as direction.

There are lots of ideas with them - they are not a holy grail and I think it's a personal thing whether you like them or not. Best to have a play with them in something like Hoadley - even paper trade them to get a good feel for the positives and negatives. It's just another strategy that probably helps with the general understanding of options and adjustments.

jackson8 said:

thanks guys for all your replies

i am currently reading in cottles book about the structure of butterflys and carding them up but sometimes takes a few readings before it starts to make sense

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stick with it, it is a hard read (for me anyways). You probably won't ever use alot of the stuff he discusses but will be glad to know it, will give you a broader understanding. On his forum you can access his teachings that are sent to you each day, can't remmember exactly which section it is in. Will help in the process of digesting the info.

sails said:

Michael Catolico is one of the contributors and is an ex US market maker. His mock trades are interesting to follow, but due to the number of adjustments - hopeless for the Oz market.

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Ah yes Mr Catolico, I have read his posts - particularly about the good, bad and ugly trader LOL

sails said:

I have also traded some diagonals and long line, multi strike calendars with extra wings. These type of calendars work wonders if IV rises a bit, but easy to lose money quickly if IV falls.

Diagonals are an interesting set-up. I did quite a large one of these in the first twelve months or so of my option trading on NCP now (NWS). Put it on just before Murdoch decided to take the company to the US. It rocketed up Being so new at it, I decided to close out - it was Thursday morning before the Easter weekend and the MMs obviously sensed I was a bit desperate so didn't get a good fill on the exit. Anyway, followed the trade through with "what-ifs" and actually found that if I had kept rolling the short call up and out, the position would have still returned a profit. But then with the frenzy of the move, I think IV would have remained farily high which would have helped as well. Didn't understand much about the greeks at that stage!

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I find diagonals when I have no spot bias, better ATM
The back month takes advantage of accumulation in gamma (speed) and long vol, while front can be shorted ATM gamma and shifted like in your example.

Eek at aussie MM's - man they are a tough lot

EDIT: Delayed responses I know

mazzatelli1000 said:

Ah yes Mr Catolico, I have read his posts - particularly about the good, bad and ugly trader LOL

I find diagonals when I have no spot bias, better ATM
The back month takes advantage of accumulation in gamma (speed) and long vol, while front can be shorted ATM gamma and shifted like in your example.

Eek at aussie MM's - man they are a tough lot

EDIT: Delayed responses I know

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lol - some mixed messages there about Mr Catolico. Not sure exactly what you mean.

I think he said he took on way too much risk at one stage as an MM and apparently took a pretty big hit. I have appreciated his sharing his knowledge so freely and seems to take pretty good care of risk in his trading - or at least last time I looked. Haven't read any of his posts for a long time now.

sails said:

lol - some mixed messages there about Mr Catolico. Not sure exactly what you mean.

I think he said he took on way too much risk at one stage as an MM and apparently took a pretty big hit. I have appreciated his sharing his knowledge so freely and seems to take pretty good care of risk in his trading - or at least last time I looked. Haven't read any of his posts for a long time now.

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Im confused too
I don't think I was attributing those descriptions to him
LOL

I was referring to one of his posts titled "good, bad and ugly trader"

If you were a good trader - you were lucky
Ugly trader - you grounded out profits

And to sum it up, not everyone could be a successful trader
WayneL has rehashed it on this forum in '07
Article

Double Flies - "M" spread

To add continuity to sails discussion in earlier posts

sails said:

As expiry approaches s begin to collapse in OTMs,

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Hi Sails,

Can I ask what "s" means, when you say "s begin to collapse in OTMs"?

Thanks,
Fox.

Fox said:

Hi Sails,

Can I ask what "s" means, when you say "s begin to collapse in OTMs"?

Thanks,
Fox.

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lol - must have been a typo & no-one else has picked it up either

Will go back through the thread & work it out...

EDIT - been back through that post of mine and "premium begins to collapse" would fit the context.

Thanks for clearing that up. I was initially thinking that 's' was some sort of greek like (s)igma or (s)tandard deviation. Then I thought that perhaps it meant (s)hare, as in the underlying. All possibilities I had did not quite fit.

Now, I'll try to digest the rest of your post. Cheers.