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ThinkorSwim settings for trading/monitoring butterfly positions

Discussion in 'Options' started by Aditya, Apr 8, 2016.

  1. Aditya

    Aditya Well-Known Member

    Hi All

    Options Newbie here and a new member here.
    I realize most of you use either OptionVue or ONE software for managing most of your trades.
    Since my capital is much smaller than most here, spending monthly on OV/ONE would eat up on my balances (hopefully non decreasing) and a monthly subscription is quite hard on a student.
    What settings would I need to configure TOS with to give comparable trade monitoring (I realize this can't be exact with respect to greeks).
    I currently like the looks of Road Trip Trade as it's mostly hands off and that's what I am interested in trading. Just wanted to check with people if anyone uses only TOS to monitor/trade RTTs. From crawling some of the threads here, I saw a mention of changing the volatility calculation. Is there anything else to keep in mind while using TOS?
    Are the P/Ls off mark? I am guessing P/L doesn't use mid prices so it overestimates Losses. I am paper trading a RTT and the P/L seems -ve while OV(trial) shows a small profit.
    Looking forward to your guidance.
    I apologize if this question is silly/irrelevant.

  2. status1

    status1 Well-Known Member

    I am using the analyze tab in TOS to track the progress of my trades
    I am using the live account to track the trade even though I am trading it at a different brokerage
    I think it's good enough I don't think you need super accuracy since you will not get the exact fill price shown to reflect the p/l
    One thing I noticed is that the paper trade account tracks the futures after hours so the p/l is way off that's why I am using the live account I don't have any special settings Just whatever the default screen is on the analyze tab

    Sure it would be nice to have better software but with a small account that is not generating enough income it's not economical
    I saw something a few days a go at Tradier brokerage where they have a deal for $55 / mo to use Option Net Explorer
    But I am not sure if they have their own platform or you have select on so I am not sure how that works

    As far as the RTT while it seems safe it doesn't make much money the way it is traded It seems like the goal is to stay outside the upper tent and just move it slowly up as it gets closer to expiration which requires quite a lot of margin and contracts so that is not doable in a small account
    So I am trading it one fly at a time and I am trying to modify the RTT to stay closer to the tent or make the tent wider to get more money out of it
  3. DGH

    DGH Administrator

    Hi status 1. Remember that TOS does not keep track of any positions which you have closed in its calculation of P/L and risk graph. You must either use other software such as OptionVue or ONE or you must manually "bring back" any adjustment/closing transactions which you have made previously as simulated trades.

    You can maintain the starting margin of a RTT (approximately) by "bringing in the wings". Specifically, when an upside adjustment is made to lock in profit you can bring in the wing of the credit side (lower side) of the butter with a vertical spread using the same strike separation as the upper. The cost of bringing in the lower wing will be less than the credit you receive for lowering the upper wing, thereby maintaining a good profit. This technique also serves to flatten the T + 0 line, thereby reducing risk and buying more time for theta decay to work its magic.

    The rationale and goals of the RTT are positive expectancy on a consistent basis. This is enabled by the low draw down, high win rate, and relatively high average win to average loss ratio. If the trader "brings in the wings" as outlined above the yields will be quite high relative to other strategies with similar risk parameters. For example, if you consistently make $800 to $1000 on a $14000 margin, you are in the 6% to 7% range. These wins add up over time to build a strong equity curve. Of course, there are several strategies which can produce higher returns, but they often carry a high price tag in terms of margin requirements, volatility risk, difficulty in management, etc., and are not really designed to be "hands off" drone trades. Also, remember that every so often a RTT will finish near the "sweet spot", such that yields may approach 20% or more.

    Good luck.

    Ann likes this.
  4. Trader G

    Trader G Well-Known Member

    I believe Dan uses the standard vol setting (individual) so I would stick with that. The P/L should be pretty accurate. If you move in to other trades you should probably consider the Vol Smile setting for the greeks and flipping back to individual vol for your current P/L. I trade a M3 style (fly below the money) and I have found that the TOS Vol Smile setting gives me a pretty good snapshot of the current greeks and T+0 projection.
  5. Trader G

    Trader G Well-Known Member

    Here is where you change it in TOS:
  6. Aditya

    Aditya Well-Known Member

    Thank you very much for your responses. There is so much to learn here and is a bit overwhelming. I'm trying to digest it slowly.
    Looking forward to lots of learning.
  7. status1

    status1 Well-Known Member

    Hi Dan,
    You are correct and I do keep track of the p/l on TOS by manually leaving in the adjustments although for small gains I find it better to not show the adjustment that way the analyzer shows the current p/l without the built in gains It's more realistic to me
    Let's say I made a $100 gain on an adjustment and the p/l showed $300 before
    Now the p/l shows $200 because I took out the gain so if I manually add it back in it's back to $300 but it's deceiving because when you close the trade you will only get $200 and if the trade starts loosing money if you don't show the gain I may make the adjustment sooner because it shows the actual losses If I have the gains in there I may make the adjustment later because it looks like the trade is not so bad when in reality it's not so good

    You said "Of course, there are several strategies which can produce higher returns, but they often carry a high price tag in terms of margin requirements, volatility risk, difficulty in management, etc., and are not really designed to be "hands off" drone trades"

    May I ask what those strategies are ?
    Are they butterfly trades or are they more directional trades ?

    I would be interested in butterfly trades that produce somewhat higher returns than the RTT with a somewhat higher price tag as far as placing it but with a near similar margin as the RTT At this point I am willing to put my "hands on" with a little management to get higher returns
    I was thinking something like a wide 100 points lower and 80 higher so it will have a 20 point margin or something like the White Rhino that was presented a few days ago on the round table
    Something that can be traded with a 10k account with some minimal adjustments
  8. DGH

    DGH Administrator

    Hi status 1.

    Directional trades such as straddles can have very high returns, but the win rate is very low. So, to achieve positive expectancy the trader must have a high ratio of average win to average loss.

    You should probably experiment with other butterfly styles, a weirdor, or even a small lot high probability condor in a 10 k account. That being said, it is possible to trade the RTT by simply trading with a 3 or 4 lot. Remember that the key to long term success in this biz is EXPECTANCY. Everyone likes to brag about their big winners, but are usually silent on their losers or their overall returns. If we don't maintain positive expectancy, we are just a "flash in the pan". Also, as you know, some traders blow up their accounts when a trade is hit hard, and they give up trading options.

    Hope you have great success in finding the strategy which works best for you.

    Good luck.

    Ann, tom, Paul Demers and 1 other person like this.
  9. Andrei

    Andrei Well-Known Member

    Hi Status1
    In my experience the most POTENTIALLY profitable butterfly strategy is JL's Bearish Butterfly. It is also the most rule based one of all his strategies. Also, unlike his other methodologies, it can be traded with just one-lot RUT butterflies instead of the usual ten-lot. However, it is probably also the most stressful strategy he teaches, as you may have to deal with very large drawdowns, as much as 15% of the planned capital which would be $5K for a one contract butterfly.
    So my suggestion would be: stick with a less volatile trades such as RTT for your live account and paper trade something like BB, then see what you think.
  10. status1

    status1 Well-Known Member

    Hi Dan,
    Thanks for the examples
    Straddles need a lot of margin so I did the next best thing I used wide iron butterfly's

    I did this last year in a 30k account on IWM where I sold 10 of the ATM put and call strikes and bought the upper call and lower put 100 points away This needs 10l margin but the loss is only half that because of the large premium received
    It worked quite well for a few trades I made $800-1200 in 2-3 weeks I did this with about 30 DTE The trade needs to be placed in a hi vol time to get the most premium ATM and preferably on a Friday that way you get the weekend to burn off some theta and start Monday with a little gain The I idea is to take advantage of the faster rate of theta decay on a 30 DTE
    The plan is to stay in the trade just long enough to burn off some theta so only about 2-3 weeks max
    One trade I got in on Monday and got out the next day with $150 profit
    After 4-5 trades I had one that was just kept grinding higher and I was down about $1600 which I did not like but I stayed in it and the market pulled back and got out with a profit
    I realized that this can be a little too risky so that's when I started to look around for something better and I found this website

    I think the main thing I discovered is how the butterfly's can be adjusted in many different ways which is the key to make profits with this trade
    I looked at the weirdor but it looked like there was a lot of adjustments which I did not like because of the extra commissions and the trade size
    The first thing I tried was a modified version of Larson's Rhino trade I placed the RUT BWB at the same place and expiration but I did not add the calendar and I only did one contract so I paid $305 for that This was in Dec 31 2015 so right before the market tanked
    As the market went down I added another fly but this time with 40 on the low side and 50 on the high side I did not close the first one as I thought the market may come back
    As the market went further down I added another fly and still kept the other fly's there
    So the expiration graph looked like a wide condor with a peak at each end and one in the middle
    So the lowest point was 2/11/2016 where the trade was showing a loss of $1309 and rut was at 953
    That was 191 points down and I had $8000 margin on 9k account so I was quite stretched at that point but I still had a month to go before expiration so I stayed in it and the market recovered and I took off the trade at near the peak of the t+0 line at the time so in total I made $1704 which is pretty good considering how low the market moved

    A few days after the RT was placed I placed a similar trade but I could not get the same price so I paid $305 for that but as the market was recovering I tried to do the same thing by placing another fly on the top side but the trade did not work out as well as the one that went lower so I only made $209 on that trade

    So as these BWB's are quite resilient I am looking to somehow enhance the upside to get a little more profit out of them
    The RT is good for bigger accounts where you can make money on the volume of contracts but for small accounts at 10K and just one contract it will be small profits that take months to make

    I like the look of this White Rhino that was presented a few days ago I know it's suggested to be done with 10 contracts but I think I will try it with one and see how that works out

    I wanted to ask you about the EXPECTANCY you mentioned
    How can I or can the expectancy be calculated for a certain strategy without actually placing the trade ?
    I saw the calculator on the website but I think that assumes you already have some data
    Also the trade can evolve from the initial stage which will change the margin so I am not sure which margin should be used for the calculation the same for the maximum risk

    I guess I can start filling it out after each trade and enter 100% for the first win I don't have a profit target so I guess that varies or I can average out the wins and maximum loss I did not have any so I could enter 1 since it does not accept 0 and I could average those out if I have any
  11. DGH

    DGH Administrator

    Hi status 1. Thanks for your detailed post. Congrats on the outcomes of the butters you mentioned, but I think I would be remiss if I did not point out that those positions might have been severely hurt in the event of another Flash Crash, Greece crisis, or 2008 scenario. That's why I like strategies in which draw downs can be controlled to some degree. I am very risk-averse, having felt the sharp end of the blade in the past. If you send me an email I will send you an Excel expectancy calculator which you can use to compare strategies and scenarios. This calculator will address the variables you mentioned.

  12. status1

    status1 Well-Known Member

    Hi Dan,
    Where can I send you my email so you can send me that Excel expectancy calculator ?
    I am not sure I want to post my email here inside the forum
  13. status1

    status1 Well-Known Member

    Hi Andrei,
    I looked at that a couple of years ago around 2014 I think and that looked like it was using a lot of capital $50k and seemed like it was relying on the market reversal lower which I assumed it probably did not do too well in 2013 when the market was grinding higher unless there was a lot of adjustments,
    I sow a presentation where it was mentioned the $5k figure but I did not see any detailed rules to go along with it
    I think I will try this White Rhino first with a one lot while it's still fresh in my mind and see how that goes
    If it doesn't work out I will look again at the BB in more detail later on
    I have quite a few different trades at the moment that I am keeping track off so I don't want to be distracted by other trades that are not live at the moment
    But I thank you for mentioning it
  14. DGH

    DGH Administrator

    Hi status 1.

    Tom just added the Expectancy Calculator, which I mentioned previously, to the "Documents" on the Class Page.

  15. status1

    status1 Well-Known Member

    Hi Dan,
    I downloaded the file
    So is this expectancy just a fancy name for the average p/l ?
    I am not exactly sure how this will help
    I added all the known data like the 1704 for the win and the margin which was 8000 at the low point so I got 100% win rate the Net p/l is 1704 which is the same as the ER(Average return) and the percent of margin was 21.30%
    Do I enter the second trade in the same column as the first one or in the Strategy 2 column ?
    I entered it in the strategy 2 column for now and I added a second row for the margin for the second one and adjusted the formula to use that one for the second trade
    So I have 209 as the ER for the second win and 2.61% of margin

    Does that tell you anything significant so far ?

    I am not sure how this this will help to evaluate a trade that I have not done before since I don't have any data to enter

    I understand your concern about the flash crash but it's hard to predict in what stage the trade will be at the time I probably would not even know about it or can do anything about it until the end of the day by which time if it was only a flash it would be back to close to normal by the end of the day
    As far as the other crisis which was a somewhat slower move I think with this mini Chinese/Fed crisis that we went through in Jan/Feb I think I am a little better prepared for it as long as I can predict which way the market will move I can position the trade accordingly or just get out altogether I am definitely not going to wait and do nothing about the trade and take the maximum loss
    Jose Perez likes this.
  16. DGH

    DGH Administrator

    Hi status 1. Expectancy is "average P/L", but, mathematically, it is based on a probability density function which helps to assess win rate, average win (dollars), and average loss (dollars) expressed as a single number. Thus, it is possible, for example, to have positive expectancy with a win rate of only 35% BUT the average win in dollars must be significantly higher than the average loss. A good example of this type of trade would be an earnings play straddle. The trader must have very high wins and very small losers to make this strategy work, since the win rate is usually fairly low. You can use the spreadsheet to help you estimate your expectancy based on likely outcomes, determined either from back testing or the experience of others. For the spreadsheet, you would enter the second and subsequent trades for the same strategy in the same column as the first. You enter trades of a different strategy or a different scenario in the strategy 2 column. Expected return is a mathematical representation (used by all casinos in setting their slots and other games) of the likelihood of profitability based on the win rate, the average win (in dollars), and the average loss (in dollars). I recognize that it is difficult to know what values to enter on a trade which you have never used previously, but a thorough understanding of the basic concepts of expected return (expectancy) is essential for trade strategy evaluation. Ideally, we like to have a reasonably high win rate with a good average win (in dollars) and a low average loss (in dollars). If you plug in various values, you will get a "feel" for this. A good Expected Return is one of the major reasons why I like the Road Trip trade.

    Hope this helps/

  17. Andrei

    Andrei Well-Known Member

    $5K capital is for 1-lot BB trade. All rules are exactly the same as for $50K 10-lot trades, just divide everything by ten.
    2013 probably was the absolutely worst market for BB. However, JL mentioned on several occasions that some of his student did very well in 2013 by applying TA and timing their trades to take advantage of dips. The market was very bullish, but had a very predictable trading channel. I was not trading it then, so I can't validate this approach with personal experience. BB is a bearish trade which does not need a bear market to be profitable. However, it requires more discipline and stronger nerves than many other Theta strategies. I trade BB but with some modifications, such as I rarely put on the third tranche or take it past 21 DTE. I also some times convert it to M3 to preserve profit, but for that you would need to trade 10-lots if you want to do it in RUT. Of course, I also accept lower profit targets.
  18. ACS

    ACS Well-Known Member

    The BB is different from most of the other trades mentioned here because it is not so much a positive Theta trade as a negative Delta trade. The Rock is similar but the BB really stands out on its own as a much more directional trade which is why applying TA in 2013 helped so much.
  19. status1

    status1 Well-Known Member

    Hi Dan,
    Thanks for the explanation
    I don't have a back testing software so I will have to see how it goes as I add my trades in there
    Looks interesting I think I got the "feel " of it
    I just added different numbers in there to see how it changes
    Looks like the number of trades is taken into account also because if I replace one $300 win with 3 $100 wins it lowers the ER

    Is there a certain ER number you are trying to achieve when you are testing a strategy or as long as it's positive it's good enough
    What is the ER for the RT just for my reference ?
    How many trades would I need to get a usable ER result ? Do I need 100 trades or just what is on that page would be enough ?

    As far as strategies goes
    Are the adjustments assumed to be part of the strategy ?
    So for the RT the initial placement is different by the time it's closed would that be still considered one strategy ?

    What if it's not placed exactly like the road trip but it's still a 40/50 BWB would that still be in the same category so it would go in the same column ?

    I got filled on the White Rhino trade today
    I got in at $4.50 for the Jun W2 expiration
    I am curious to find out how it will work out and what will be the ER for that trade
  20. DGH

    DGH Administrator

    Hi status 1.
    Tom and I will be posting a Power Point presentation soon which will cover the nuances of expectancy as well as many other aspects of options trading. It should answer most of your questions. If not please submit another post with the unanswered questions. I think you will find it very helpful. In addition it may give you some additional insights in your trading, choice of strategies, etc.

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