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Butterfly Trading

Discussion in 'Options' started by Larry Brogan, Feb 18, 2016.

  1. Larry Brogan

    Larry Brogan Member

    Per the advice and encouragement of many of you I have been studying Butterflys. Some of it gets pretty complicated for my less than mathematical mind. I wish I had paid more attention to math and the sciences in high school but I was in love with Carol and hockey. Carol dumped me and I had top stop playing hockey at age 65----my body was broken. So now here I am lost in the world of deltas, gammas and thetas and my eyes are bleeding. I eventually will learn to trade butterflys I just want it to be in my lifetime (age73). I've studied the CBOE site and many others on YouTube which have been helpful. Is there any step by step help out there that someone would recommend-----you know "Butterflys For Dummies". Would greatly appreciate. I'm sure many of you can identify with that moment when you're eyes glazed over.
    Thanks a lot for any help.:oops::(o_O
    Larry Brogan
  2. GreenZone

    GreenZone Well-Known Member

  3. Timo

    Timo Active Member

    Hi Ron,

    I'd be interested why you suggested the Rhino as the trade to start out with. Is there a certain aspect other than the really flat T+0 line and robustness of the trade?

    I really like the trade as well but am not sure whether I should rather go with the Kevlar or the Rhino.

    What does everyone else think about these 2 trades ... what are the pros and cons to each one? I'd love to hear from some traders that have had real life trading experience with either or both.

    Thanks so much guys!
  4. Andrei

    Andrei Well-Known Member

    Hi Larry,
    Don't worry about the math... It may be confusing at first, but it is not all that complicated, just requires some hands-on experience, so back testing and/or paper trading is the best learning tool. Observe T+0 line and how it changes with price movements, Vol and DTE. After a few dozen trades it will all start making sense. I suggest stay away from any strategies requiring trades with different expiration cycles (i.e. calendars, diagonals). It will just muddy the waters and complicate learning, you can include them later...

    I started with Condors, results were lousy but I learned a lot. In terms of learning the most helpful trade was JL's M3. There are many recordings on YouTube you can watch before you decide to buy (or not) any of his courses.

    Hope it helps.
    Last edited: Feb 18, 2016
  5. Tim

    Tim Well-Known Member

    Don't get hung up on the names of the trades - Kevlar, Rhino, M3, M9, Mango, Roadtrip on and on are all variations of how to trade a butterfly. All work. What makes the difference is how you manage these trades when you are in them. Ultimately you will focus on one particular set of guidelines and get good at it. But I would suggest working on understanding the characteristics of butterflies, which are different than for example calendars. I happen to focus on M3 and it is a very good trade with lots of following. I agree, exhaust all the free resources before deciding whether or not to buy any courses, you may not need it.

    I glazed over in my early days when I thought I knew all I needed to, then I found out about greeks and a lot more stuff. But it was also a challenge and I went for it. It is a very steep learning curve, but once you get past that initial hump it isn't really all that complicated. I have several scientific calculators on my desk and what do I use them for in options? Add, subtract, multiply and divide. (disclaimer - I am somewhat of a scientific calculator collector). I think Carol was unwise to leave you :)
    Tps likes this.
  6. Larry Brogan

    Larry Brogan Member

    Tim, what are your thoughts on just trading SPX? If so is there a certain standard deviation i.e. 1.5 or 1.75 for the ITM call and the OTM call? Does it make any difference whether one uses calls or put? How far out should the set up be? Do you usually shut it down at some pre-determined profit i.e. 15 to 20%. Is the same true for losses?
    Thanks everybody for your help.
  7. Tim

    Tim Well-Known Member

    Great questions Larry. And they are deep and we could and maybe should talk a lot about them. Here's my thoughts to start. I say generally often because these are general characteristics about BF. Individual strategies will have their own characteristics.

    You can just trade BF on SPX. Its widely traded, liquid, has weeklies and lots of strikes. But each underlying is its own animal. You shouldn't take guidelines someone has developed say for RUT and trade SPX with them. SPX will have different reactions to events, and trade at different speeds than RUT. Generally at the least you need to have wider wings on SPX than RUt but you should at least backtest the rule set you are going to use to make sure you know it. I usually like to have trades in different underlyings chosen so that hopefully they are inversely correlated so you don't get hit all at the same time on all trades. Its hard to do. But for example, M3 is the main trade for me and the one I am willing to work hard on, others I hope to be more no-touch. Its why for my naked puts I only do low beta, large cap stocks that sell a lot of diversified product.

    Not sure how to comment on using std deviations for placing the longs. I think generally that is determined by the wing width you want and where you place the shorts. Butterflies generally work better with the shorts near the money (not true in all cases - some strategies do things to the trade so that it still works outside the tent - M3, Mango etc. but these things take more margin, or have more delta, or cost you in some way.

    Regarding DTE, the longer it is the more gently the trade will treat you in a large move or a large vol change. But, the less theta it will gather each day. So the guidelines are usually tailored to balance that out, and make profit by vol changes or directional movement instead. doing BF longer can result in you being exposed to market risk for a long time and not getting paid for it. But it can also result in not getting hit by a large move as much as shorter term ones.

    Ah, calls or puts. The short answer is, call BF, put BF or IB are equivalent. There are differences in how you manage them and your guidelines, and in how buying power/margin are handled. But they will all have BF characteristics. IB you sell for a credit, then buy it back for less. Call or put BF you buy for a debit then sell it for more. In the end I think that comes down to preference.

    Yes totally, if the trade reaches my profit target I am out. If at the time we are say, in the exact middle of the tent with low vix and the war in Syria has ended and all, I MIGHT stay in a little longer to reach a stretch goal. However your trading plan should be built on good solid returns and if you meet them it is time to move on. Same for losses. General acceptable maximum loss is about 1 to 1.5 month's average profit with a strategy. More than that and you will have a loss that will take months to recover. If at any time in the trade your p/l reaches max loss you must exit. Now, caveat, if you are very experienced with the strategy and your risk tolerance allows it, at that time if you see a clear adjustment strategy that has been backtested and it is safe you may be able to stay in. I have, for example seen a BF in testing that had a little more than profit target, then one day later it was down $20,000 (10 times max loss). It wasn't safe to stay in. You can't handle that. Until you get a lot of experience though, you exit at max loss.

    Cap Disc, its webinars and these forums are an excellent place to hang out and learn and participate.
    Rtb likes this.
  8. SVL

    SVL Well-Known Member

    For anyone who begins studying butterflies on a tight budget, there is a e-book available on amazon for purchase for $2.99 written by Gavin McMaster "Bullsh Free Butterfly Spreads E-book" (amazon.com/BULLSH-FREE-GUIDE-BUTTERFLY-SPREADS-ebook/dp/B00FGYTA42[/)
    Gavin McMaster has a lot of very useful information on his web site http://www.optionstradingiq.com
    Hope this helps.
    Avi likes this.
  9. GreenZone

    GreenZone Well-Known Member

    I recommend the Rhino for people starting out because it is a fully mechanical trade with no discretion needed.
    You just follow the trade plan, as defined, and the trade typically does quite well.
    It also helps that Brian is running a trading advisory service for this trade, so this is something which beginners can use as another resource to get practice.

    I also tend to recommend it more than the RoadTrip because it will end up teaching the trader more about greeks and adjustments, which I think is important to learn.
    The RoadTrip trade is more of a "slap on / take off" type of trade with little to no adjustments, so although it's a perfectly fine trade from a profit perspective, I feel that a starting trader can learn more from the Rhino.

    I recommend it more than the Kevlar due to the fact that the Kevlar is a "concept trade" with no fixed rules.
    For someone starting out, I think following a very specific trade plan will provide the most benefit and psychological comfort.

    Once you've learnt the Rhino, and have traded it live for multiple months, then I would recommend studying John Locke's M3.
    This is a concept trade, with guidelines rather than fixed rules, but it's a great way to learn how to do more complex adjustments.

    After you've learnt those two (Rhino and M3), there are multiple paths to take.
    Since the Rhino and M3 are more neutral to slightly bullish trades, it's useful to learn some kind of bearish leaning trade as well as a bullish learning trade.
    For bearish leaning, you could look at John Locke's Bearish Butterfly, or my Space Trip trade.
    For bullish leaning, you could look at the Parking Trade.

    Now that you've got a neutral trade, a bearish trade, and a bullish trade, then you can learn basic market timing (technical analysis) in order to assist you with deciding which trade type to put on at a time which is a bit more optimal.
    Rtb, Bjorn, Avi and 4 others like this.
  10. status1

    status1 Well-Known Member

    I wish that was the case but for some reason there are more adjustments made than needed in my opinion on the Road trip that is presented on this website Maybe it's because the market went down so much so fast I am not sure
    I made the similar trade a few days later with different strikes and I only made one adjustment recently when it went out of the lower part of the tent while the Road trip presented was adjusted 2-3 times and even repositioned getting whipsawed and loosing money and now it's back around where it started and could have been taken off for a profit if it was left alone
    Maybe it's just me but there seems to be an obsession or a hard rule that the T+0 line must be a certain way so there seems to be a need to constantly adjust or tweak the trade without paying much attention to the market and how fast it went down and the possibility of a bounce
    This is my first Road trip trade so maybe this doesn't happen normally but that's just my first impression

    The webinars are a great help to get you started on the concepts and some of the rules on how to set it up but the key is in the management of the trade which is more dependent on each individual situation so any adjustment made that is shown in a video by someone who has a lot of capital cannot be followed by someone with a lot less capital
    So no one here can tell you how and where to make that adjustment but with some paper trading I think you can develop a style that fits your needs and than start small with just 1 lot and see how you can manage it live After doing that for a while I think you will get a sense of what you have to do to manage the trade

    You can use the Rhino trade to help you set it up but you may need to adjust it to fit your capital and while you can look at how someone makes the adjustment it does not mean that you have to follow it exactly and many times you may not want to because you may have a different opinion about the market direction or can't because you have a different capital so you can't make the same adjustments
    The risk graph will tel you a lot about how the trade is doing and where it needs to be adjusted but it is op to the traders judgement to determine when to adjust and by how much and that can only be done by your own trading style and capital
    dacamon likes this.
  11. omar

    omar Guest

    Hello, forgive the English is with google translator, I speak Castilian, no English,
    I wondered if more people like me out here.

    New to options, I have about 6 pluses studying, studying iron condor ... the problematic after making several hundred test with one is that I is to be adjusted too and it is not what I thought.

    Now on my own, I am researching and testing BWB / Call and BWB / Put and the picture changes dramatically.

    No, if it is the right place to post this, please tell me if not for here.

    I am currently doing tests with this setup.
    DTE 65
    long width up 10 points, 4 contracts
    short (+ - 11 deltas), 10 contracts
    long dow 20 points wide, 6 contracts

    The raw results are very good.
    I wanted to ask if someone uses this setup you real and going.
    The problem that I encounter is that I have no knowledge of volatility skew and researching out there apparently is quite critical to this operation.
    Al'll look the issue is that the skew (concavity or convexity) curl.

  12. status1

    status1 Well-Known Member

    In my opinion if you are that far out (-11 delta ) and doing it on SPX on puts I don't think the placement of the trade is that critical
    You might have a hard time getting filled on a bwb and you are not getting much protection
    At that point you might as well just make it a simple short vertical if you think the market will not go that low
    Looking at the jun1 weekly spx put 1890/1880/1860 with qty of 4/10/6 you get 2.40 credit mid price which comes out to 480 on a risk of 8000
    For 8000 risk you could do just 4 contracts of 1880/1860 and you would get 520 for it and you might get a better chance on a fill if the market goes down
  13. omar

    omar Guest

    The idea is to use the Rut, which has more liquidity OTM easier to fill .The SPX would be better closer to money.
    The truth, had not made this simple test, vertical and you are absolutely right, does not protect anything.
    BWB 4106.jpg
    Vertical Simple
    BULL PUT 44.jpg
    The issue of credit, was demanding a minimum of 4%.
    Backtes with "One" although it is not real, because as I read enter the mid price is imposible.Me give average target of 8% to approx 8000 Cliffhanger.
  14. Mark Mosley

    Mark Mosley Member

    More to the original topic of this thread, and I hope Ron Bertino is still reading...Most of the stratiges like the M3 and the roadtrip trade seem to run negative vega. The rhino trade seems to run positive vega due to the calendar spread. I wonder how this affects performance, as I would think an upward move in price would bring falling volatility, hurting the value of the calendar end of the trade ( in the Rhino). I am also interested in layering the Spacetrip trade with a closer to the money butterfly like the Roadtrip, however I wonder if the Rhino might make a better pairing, or maybe the calendar isnt necessary if doing the Spacetrip also with it?
    Last edited: Apr 9, 2016
  15. ACS

    ACS Well-Known Member

    You have to be careful with calendar spreads. Depending on how far apart the expirations are, they may not be as positive Vega as the software tells you. Each expiration responds differently to an increase in volatility with the closer ones usually responding more than the later ones. Ron Bertino has done some excellent presentations on the subject (weighted Vega) here and they are worth seeking out.
    Oliver and Andrei like this.
  16. Woad Hill

    Woad Hill Member

    Regarding the "multiple paths to take", what do you think about Tony Sizemore's approach?
  17. GreenZone

    GreenZone Well-Known Member

    If by "approach" you mean his courses, then I'd suggest taking his courses only later on, once you are quite experienced.
    There is no trade plan with Tony Sizemore, and you typically won't even find "guidelines" as you have with a course such as John Locke's M3.

    Tony is a skilled trader, but learning to trade the way he does is fairly difficult, since you have to develop "market feel" and also have an in-depth knowledge of many options strategies and knowing which ones to apply in particular situations.

    It's basically a "trade by the greeks" style of trading, where almost anything goes, as long as it brings your greeks back in line.

    There are some gold nuggets to be learnt from watching him trade, but expect this knowledge transfer to take quite a long time to absorb.

    The same thing applies to the guys at StratagemTrade and RandomWalkTrading.
  18. Woad Hill

    Woad Hill Member

    Ron, thanks for replying and for the advice. I watched his Roundtable vid on YouTube and see what you mean.

    Btw, I also watched your vid where you covered your Space Trip Trade. Do you mind sharing your slides?
  19. Bryan Doyle

    Bryan Doyle Well-Known Member

    Ron's slides are in the Library on this site. Go to 1/27/16 to find them.
  20. Kannappan

    Kannappan Member

    I've been around the options community since 2004, and learned a great deal from Tony and I can tell you there is ALWAYS a trade plan. Most of the trading strategies mentioned on these forums and others, got their origin with Sizemore. My eyes really got opened when I was introduced to his "Managing by the Greeks" approach in and around 2007-2008. Prior to that, I had never seen positions traded that way and neither had anyone else in the Options Communities that existed at that time.

    Some strategies mentioned here such as the Rhino, Road Trip, Weidor, M3 etc, came about because of the introduction of the concept of "Managing by the Greeks". Properly managing by the Greeks definitely has a trade plan. What I learned from Tony is that if you stick to a rigid set of rules, most of which were back traded to arrive at a "best fit", you will be handicapping yourself and possibly have long term frustration when, over a period of time, the strategies might just breakeven. There might be some good traders who would disagree with me, but I would recommend to anyone new to trading, even intermediate level, that they get some of his video's so they can see what they are working towards. One final thing. I've traded most of the various types of trading strategies mentioned on these forums and have attempted to follow the rules/guidelines and found that most have way too many rules in an attempt to cover every situation. A trader can tell when they are scrambling and not trading effectively when they have many different strikes involved all up and down the matrix. One guideline I recommend is that if a type of trade is such, after following the rules/guidelines, you wind up with multiple contracts in back-to-back strikes up and down the matrix, then that's a sign the rules/guidelines are not effective and you wasting effort. In other words “micro adjustments” indicate not being in control.

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