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Discussion in 'Options' started by Rod M, Jun 13, 2015.

  1. Rod M

    Rod M Well-Known Member

    In modeling various BWB adjustments in Ovue, I have been looking at adding additional flies above the existing strike of RUT wheenever the price moves very far outside of the tent.... in order to move the leading edge of the BWB upwards and keep the price inside of the tent. On paper this looks like a great adjustment with the caveat that it also increases the negative deltas.

    I would appreciate comments on this as it looks like a great adjustment...especially toward the end of the expiration cycle of the fly. thanks.
  2. Venkat

    Venkat Guest

    Rod: Adding BWB at the top edge is indeed a GREAT adjustment. It extends the tent and increases theta as well. You can play with the strikes, wing widths and location of the short strikes to control negative deltas.
  3. Rod M

    Rod M Well-Known Member

    Thanks. When adjusting in this manner, I guess you have to ignore the Delta/Theta ratio and concentrate on the chart itself. Maybe a rule of thumb that says add OTM flies whenever the RUT moves 20 points outside of your tent with the goal of bringing it back inside the tent.
  4. RayM

    RayM Well-Known Member

    Showing a Option Vue Superimpose of the current and proposed adjust would be very helpful here.
  5. Venkat

    Venkat Guest

    1) Greek Ratios: I have seen people using Delta/Theta ratio as rules of thumb, which in my experience should be based on DTE. Early in the trade, perhaps a ratio of 1.0 is a good measure. Later in the trade, you can try to cut it down to even 0.1. (Ex: Bearish Butterfly or Tony Sizemore's trades)

    2) Coming up with absolute deltas requires extensive backtesting and sticking to the same trade structure (Ex: M3).

    3) Going by T+0 is more art than science. Every adjustment you make TODAY may affect what adjustment options you might have TOMORROW. (Ex: If your adjustments are shrinking the total wing width of the butterfly, essentially you are taking money off from the trade and hence lower theta. If you are locking in significant losses with every adjustment, it becomes that much more difficult to recover from those losses later in the trade, especially if you are decreasing theta).

    Coming back to the concept of adding butterflys, here is my thought. If you originally designed the trade as a mean-reversion trade, you are trying to accumulate negative deltas and exit on a pullback. The quicker you accumulate those negative deltas, the better. On the other hand, the trade should not get killed by those negative deltas on a move up. So, it's a trade-off. That's why I mentioned in my earlier posts that you can use the wing widths, strike locations or even wing ratios to control greeks.
    Rick, ccc and RayM like this.
  6. Rod M

    Rod M Well-Known Member

    thanks Venkat.

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