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M3 entry - Butterflies vs Call

Discussion in 'Options' started by Barbeito, Sep 14, 2016.

  1. Barbeito

    Barbeito Member

    For all the M3 traders, how do you time the entry of the butterflies vs the call?

    Best prices for butterflies are available when market is going up intraday and the opposite for calls. Do you focus your efforts on getting the best price for the butterflies and buy the call soon after? Do you enter the butterflies and leave it unhedged for some time waiting for some type of intraday reversal?

    Do you have any other form of timing or process to get the best combination of butterfly vs call price?

    Thanks very much for the support.
     
  2. Paul Demers

    Paul Demers Well-Known Member

    Personally I try to put my trades on a down day and close them on an up day.
     
  3. AKJ

    AKJ Well-Known Member

    Hi Barbeito,

    I do not trade the M3 myself, so I am just guessing, but based on my knowledge of options market liquidity, I can think of two different approaches that one might consider.

    Approach 1: Buy butterflies first, then buy long call.
    - Reason: By buying the butterflies first, you are taking care of the more complex portion of the trade first. It is usually more difficult to get a 3-legged option trade executed than a single option. As a general rule of thumb, if I have to leg into a trade, I leg into the less liquid portion first, then try to quickly fill the more liquid portion

    Approach 2: Buy half the butterflies, then buy long call, then buy other half of the butterflies.
    - Reason: This is what I would consider the "minimize delta exposure" approach. Roughly speaking if you buy either All the butterflies first or the Long Call first, you are exposing yourself to ~90 deltas in one direction or the other while you wait to fill the other leg. By buying half the butterflies, then the long call, then the other half of the butterflies, your delta exposure should go from -45 to +45 to ~0.

    I'd be interested to hear from actual M3 traders to see if their approach differs from how I would intuitively go about it.
     
  4. Steve S

    Steve S Well-Known Member

    Put on the flyes, hedge the delta with some combination of futures and etf, then get a cup of coffee and relax for awhile before you do the calls.
     
  5. Paul Demers

    Paul Demers Well-Known Member

    Once the butterfly order gets filled why not just buy the call and then go buy a cup of coffee with the commissions that you saved from having to buy the futures contracts or the etf.
     
    Ice101781 and (deleted member) like this.
  6. Steve S

    Steve S Well-Known Member

    An excellent and worthy alternative! Depends on how much distaste you have for being artificially forced into an urgent situation for getting the calls on in a moving market. Personally, I'm very fond of NOT being in that situation.
     
  7. AKJ

    AKJ Well-Known Member

    I've always wondered, why even bother with the long call - why not just hedge the butterfly with delta 1 alternatives and avoid the negative theta and illiquid market related to the DITM call. You would have to adjust your trade plan accordingly and it may not hold up as well on aggressive down moves, but it may be a worthwhile trade off.
     
  8. DavidF

    DavidF Well-Known Member

    Regarding trying to time entry of each side and intraday moves I´ve been hit doing this before, both to upside (calls off first the watching market shoot up) and downside. The evidence suggests I´m useless at predicting intraday moves to get advantageous fills on either side. If I really could predict it I´d simply day trade futures. Also can´t control market moving news whislt you try to time a trade which could hurt badly (been there).

    Mostly struggled with DITM calls, trade entry ok but exit difficult as MMs often don´t bite until market bounces past intrinsic value. Am placing more and more trades with /ES futures and OTM puts (at strike close to where I would buy the call, <$10 premium) instead of call, silky smooth, quick and stress free.

    I think for longer duration M3s DITM calls are ok but for shorter duration trades other options are better (like futues + puts or Paul Demers closer to the money calls)
     
    Last edited: Sep 15, 2016
  9. watersc

    watersc Guest

    i trade M3-like spread (call 10pt below the short)
    i promised myself not to time the market again (entry/exit)
    and i wont break my spreads into verticals for a little slippage gain

    now i see the spread (fly/condor and call) as one package
    when the price is right, i simply buy it :D

    specifically when the market is green
    and made a doji on 30-min chart
    fly first then call

    #simple :D
     
  10. Barbeito

    Barbeito Member

    Hi Paul,
    I was referring to the entry on an intraday basis, after the decision to enter on that specific day was made. Thanks for your comment
     
  11. Steve S

    Steve S Well-Known Member

    Simple answer is, the thing is a put and not a call ... it's not such a big deal to the upside, but on the downside it's the difference between limited risk and unlimited risk. See image of same fly with/without put, and delta hedged for both positions: M3_put_vs_no_put.JPG
     
  12. Barbeito

    Barbeito Member

    Hi Andrew,

    I use approach 1 but because I buy the butterflies for the best price when market is going up, I get hurt on the prices of the calls. So immediately after I enter the trade I have loss which normally takes a few days or more to reverse. Based on my experience, having better prices for butterflies is far better than overpaying for the calls but I was wondering if I could avoid this the call overprice trade off in some way.

    Approach 2 could be an option and could definitely work to minimize call overpaying with the downside of extra negative delta exposure. I trade more than 1 M3 unit so I have more flexibility on the number of calls with this approach. It's definitely a good alternative to approach 1.

    Thanks for your comments.
     
  13. Barbeito

    Barbeito Member

    Hi Steve,

    Do you use this approach? If so, do pay for the extra future commissions with better call prices?

    I think the extra commissions paid to buy futures would not be a problem because the call prices that one can get on an intraday reversal or the market stalling would far exceed that extra cost. Worst case scenario could be that market keeps going up intraday and at the end of the session, you will have to close your futures position and open the calls with no benefit of the extra complication and cost. But, in most of the days, it could actually work to have the best combination of butterfly/call prices.

    Thanks for the comment!
     
  14. Paul Demers

    Paul Demers Well-Known Member

    During the day the market typically will go from trending to being in balance. I am looking for the times when it is in balance to do my trades.
     
  15. Gabor Maly

    Gabor Maly Well-Known Member

    Well there is a benefit as you were able to immediately hedge you negative delta without paying up.... sure at the EOD you are now paying more for the calls, but you are also closing the /ES for a profit.
     
  16. Barbeito

    Barbeito Member

    Hi David,

    My issue with your approach is the modeling and back test of it. I guess you add the /ES futures delta mentally to your OV delta.

    Thanks for the input!
     
  17. Barbeito

    Barbeito Member

    Hi watersc,

    When you say "call 10pt below the short" is this 10 points below the lower long put strikes or 10 points below the short strikes of the butterfly?

    Thanks for the input!
     
  18. Steve S

    Steve S Well-Known Member

    I always do this when legging into any package where the legs have significant delta. It goes without saying that the extra commissions are insignificant for something like an M3, but they can be significant for something like legging into a fly with verticals. As always, the extra slippage is more significant than the commissions, particularly for ES, but for me the tradeoff is a no-brainer as I'm naturally lazy and have absolutely no confidence in my ability to read the tape and work the legs to my advantage against the tape.

    Warning: So far as I can tell, almost nobody in this community, or in any other options-income-oriented community, works their legs on a hedged basis, and a lot of these folks are 10-1000 times more talented and experienced than I am ... so probably best to ignore me and trade like the champs.

    But FWIW, here is the best reason why, for me, working legs unhedged is generally "not optional": because to me, it's totally unacceptable to risk having half a package on unhedged if/when my system goes down - no matter how small the probability is of this happening, it's unacceptable (for everything except small "toy" trades). If you're working legs on a hedged basis then you can enter your options orders with a paired futures or etf order that resides on the broker's server, so if my system goes down or if I suffer a major stroke, my order will still be hedged if filled.
     
    Rakesh likes this.
  19. Gabor Maly

    Gabor Maly Well-Known Member

    You can do it in OV.
    Step 1) Under the define / futures tab populate the fields as follows:
    ES_Define.gif

    Step 2) If you want to go long futures simply enter the number of contracts in the active Futures expiration and hit convert trades.

    2016-09-15_17-12-07.jpg
     
    Murphy Tan and DavidF like this.
  20. DavidF

    DavidF Well-Known Member

    Hi Barbeito, as you can see from Gabor above it´s doable. Also in the Format tab you can sort your futures legend like you do your options.

    One another thing I like about using futures and the put is that the greeks and price don´t get affected by the "sluggish" changes in the DITM call.

    Screen Shot 2016-09-15 at 17.29.05.png
     

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