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Bearish Butterfly Pricing

Discussion in 'Options' started by Balazs, Feb 2, 2016.

  1. Balazs

    Balazs Member

    Dear fellow Traders,

    The last two weeks there were 2 very interesting webinars on two different platforms. The first was on OptionsTribe where Ryan Moffett spoke about his own BB tweaked for the SPX and his own risk tolerances. The other webinar was the trader of the month on John Locke's website with the well known Kevin Lee. After looking at the two presentations, i realised again something that I actually already knew: the importance of the pricing of a Butterfly.

    Kevin makes his own spreadsheet (almost daily) of a series of butterflies to have a good feel of the market. It is increadible to see how much information can be derived from how butterfly prices move around. Ryan also looks at the prices of butterflies but mainly to determine his risk tolerance and of the environment we are currently in. Basically saying, if the price of the fly is this, then he either won't enter or will have very narrow or wide risk tollerances.

    Today I fooled around in ONE testing all kinds of Butterfly pices over the past couple of years and tried to figure out of there is a clear correlation between the startng price of the fly and the profitibility of the bearish Butterfly trade. Even though this might sound like a straight forward and easy assumption to make, I stumbled apon some inconsistancies. So my qyestion is, has anybody done some backtesting with the pricing of butterflies and mirror them against VIX or other relevant data to determine if the environment the price suggests is suitable for entry or perhaps even determining medium term market direction (Ryan was able to assume some kind of correction in mid June 2015, just based upon the pricing of butterflies).

    I have the feeling that there is much more to derive from these prices than we currently do (basically just following guidelines).
    All input is more than welcome.

    Timo and Kevin Lee like this.
  2. ACS

    ACS Well-Known Member

    Pay attention to not only the price but also the Delta of the butterfly at entry. The combination will give a guesstimate of how easy it will be to reach the profit target and how much adverse movement the position will take before hitting maximum loss.
  3. David R

    David R Member

    I too am very interested in this topic. I really enjoyed Ryan's presentation (bad audio aside) and am looking forward to his trader of the month presentation with John Locke (Feb 18th). I'm hoping he might share his thoughts on RUT butterfly pricing.
    I was also really impressed with Kevin's presentation. He is very thorough and it's easy to see why he is so successful.
  4. Balazs

    Balazs Member

    Hi ACS,

    that is a good point. Do you have a delta range, price range or a combination of the two where you will not put a BB on, or hedge it off?
  5. ACS

    ACS Well-Known Member

    At 56 DTE I usually want a butterfly price below 10 and a Delta below -9 unless the RUT is up more than 100 points from the last major bottom, then I will ignore them.
    Timo likes this.

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