Quantcast
  1. This site uses cookies. By continuing to use this site, you are agreeing to our use of cookies. Learn More.

ADDING CALL CREDIT SPREAD TO BW BUTTERFLY ??

Discussion in 'Options' started by Rod M, May 28, 2015.

  1. Rod M

    Rod M Well-Known Member

    I have been modeling this and so I am posting the question to see if anyone has comments.

    When trading a BW Fly....either the M3 or Tony Sizemore's version, do you ever add a call credit spread to the trade. By doing this I can increase the overall profitability of the trade, but with the added risk of more negative vega. If I am more concerned about the trade moving down, then my preference is to use a long put spread to increase vega and lower deltas. The only added risk is more upside risk if the trade rallies.

    Any thoughts or comments ?
     
  2. tom

    tom Administrator Staff Member

    It's a reasonable thing to do. I would treat it similar to Dan Harvey's weirdors. Just put a small number of call credit spreads on and start peeling them off well before the spot price gets to the short strike. (probably 20 points before on SPX/RUT for example).
     
  3. Rod M

    Rod M Well-Known Member

    thanks for the confirm.
     
  4. Stephen

    Stephen Member

    With volty so low it doesn't make much sense to me. I'd rather use some of the BWB credit to buy 1 or 2 call debit spreads b/t 30 and 16 delta out. The credit rec'd won't justify the added risk and current vol skew dynamics. Of course, if you are doing these at higher dte like 50+ days out then it may make more sense.

    FYI - Sizemore often uses short dated (<14dte) Put Ratio Flies rather than a straight BWB. His put debit side is wider than his put credit side of the "fly". In this case, try modeling itm/atm put debits to expand the upside tent and toggle the greeks and/or ratios you want. They hold value longer in most situations. If you add call credits to an M3 then you are no longer in concept...so it won't behave like an M3.

    Just my 2 cents.
     
    gmat likes this.
  5. Rod M

    Rod M Well-Known Member

    Stephen:
    I agree with you....although a more experienced trader might be comfortable with the downward sloping T Line, I found myself being overly concerned about what a rally would do to the upside of my position. I took the call spread off on Friday for a small profit and decided to keep my adjustments in the Puts...and gain the benefit of added positive vega if I have to add any put debit spreads.
     

Share This Page