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Underlyings for M3 and BB => RUT vs. IWM and SPX vs ES vs SPY

Discussion in 'Options' started by guwe75, Feb 12, 2016.

  1. guwe75

    guwe75 Active Member

    I would like to discuss, which are the superior instruments to trade M3 or BB taken into consideration buying power effect and total cost efficiency.
    For major equity indexes like S&P500, RUT and ESTX50 I have analysed the products which can be traded via IB.

    To analyse the total cost perspective (total costs => spread + commissions) of iron butterflies in the different instruments I have compared the following:
    1) bid/ask spreads and the associated costs
    2) spreads if mid prices can be achieved and the cost effect
    3) cost of commissions in order to trade the identical notional value for each
    4) buying power effect in a RegT account

    IMHO for S&P 500 the order seems to be:
    1) ES (spreads No. 2, commissions 2, buying power 1)
    2) SPY (best spreads => best pricing, worst commissions due to lowest contract size, buying power 2)
    3) SPX (worst spreads, lowest commissions due to highest contract size, buying power 2 => the same as SPY)

    For a portfolio margin account it seems to be that even for large notional value trades SPY is the superior instrument to trade the S&P500 with an M3 or BB.
    The highly competitive spreads of the SPY outweigh the higher commissions by far. The effect is even more important when there is trade mangement necessary

    For RUT the conclusion is the same: IWM is way more cost efficent than RUT.

    ESTX50 options are almost as cost efficient as SPY (better than ES and SPX) but have SPAN margin which is the same buying power as the ES FOP.

    Which of the instruments you guys trade and why? Do you consider the cost efficiency to select the the instrument for your trades?
  2. ACS

    ACS Well-Known Member

    Spend time browsing the forums and you will notice that SPX and RUT options overwhelmingly predominate in the trading done by members. They provide the best balance of liquidity, margin and commissions.
  3. GreenZone

    GreenZone Well-Known Member

    That's fine, but just realize that the John Locke trades (M3 and Bearish Butterfly) were specifically designed for the RUT.
    You'll have difficulty doing these trades on other underlyings without slightly tweaking the rules.
  4. Andrei

    Andrei Well-Known Member

    I have never tries to do a "controlled" study of RUT vs IWM or SPX vs SPY, but just from experience I don't find the ETF give you "way" better execution enough to offset commissions.
    I trade JL's M3 and BB in RUT. In todays market you may need close to 20 butterflies in RUT for one call. To get similar exposure in IWM you would need close to 200 butterflies. It is a lot of commissions just to set it up.
    In SPX I trade something similar to Road Trip. I find with patience I get reasonable fills especially on Monthly cycles (weelys take a little longer).

    Also SPX and RUT options are taxed like futures: 40% ST and 60% LT. ETFs are taxed at regular rates, makes a difference if you make anything over just a couple of thousand.

    I do not know much about options on /ES or /TF, but commissions seem to be very high at least in TOS.
  5. Capt Hobbes

    Capt Hobbes Well-Known Member

    Last year I was trading a downsized M3 in RUT and IWM and my overall impression was that RUT trades were easier to get filled close to the mid. Granted, it's not exactly apples-to-apples because of the different trades. I chose to adjust by moving the butterfly strikes instead of adding IWM verticals on top of the original butterfly, so RUT trades were the original butterfly and then verticals and unbalanced condors, while IWM was mostly going in and out of single calls.

    @Andrei, any more observations you can share about SPX (monthly) compared to SPXW? I've been trading the Road Trip in the original biweekly form, but I'm thinking of switching to monthlies to have fewer cats to herd. Thanks!
  6. Rickbw

    Rickbw Member

    When you say "downsized M3 in RUT and IWM" can you explain further? Do you do 50% of what JL does, 25%, or is there a better way of describing? I'm currently learning the M21 program and am curious how others handle the size required. Thanks.
  7. Capt Hobbes

    Capt Hobbes Well-Known Member

    JL explains in a few presentations how to scale it down to 1/10 the standard size, for $5k planned capital. Instead of 10 RUT butterflies and 1 call, you use 1 RUT butterfly and 1 IWM call. You can't mix underlyings in OV, so you still model it as 10 flies and 1 call in RUT. All adjustments are with verticals in IWM. In theory, you could also just trade everything in IWM, but commissions would eat most of your profits. The main drawbacks of this IWM exposure, besides imprecise modeling in OV, is the assignment risk on short options, and the dividend hit causing the IWM call to lose value.

    Another way of scaling down that avoids these drawbacks is M3 Unhedged, which starts off as a simple BWB without a call. Instead of trying to keep the t+0 line very flat, you keep it not very steep (watching the delta/theta ratio). You adjust by moving the strikes of the BWB (so it becomes an unbalanced condor). This one can also be traded with 1 RUT butterfly for $5k in planned capital, but 2 or 3 would make precise adjustments easier.

    I liked a hybrid version of these two. I would start with a RUT butterfly and an IWM call, but then did all the adjustments M3U style by moving the strikes in RUT. So I never had anything in IWM other than the long call, so no assignment risk. Before the dividends I would take off the call to avoid the hit and switch to an unhedged configuration. Or sometimes I would switch the hedged/unhedged configuration when adjusting because the switch would produce a better t+0 line.
  8. ACS

    ACS Well-Known Member

    If you have the M21 course then you have the bonus video that explains how to trade smaller size in the M3, BB & Rock.
  9. Rickbw

    Rickbw Member

    Thanks ACS, I just haven't made it to that video yet (it is the last one). I've heard John mention smaller accounts and using IWM & was curious based on it being mentioned in this thread. I'm not a newbie to options, but have been more of a directional trader with spreads. I'm looking forward to learning more about neutral strategies with John's M21 package.
  10. guwe75

    guwe75 Active Member

    Take a look at my observations from a random day such as mid of February

    Cost efficiency M3 underlyings.png

    1) costs are calculated for the number of contracts required to trade a notional equivalent of approx. 50 T USD or €.
    2) commissions are IB commissions which are significantly less than TOS/TDA particularly for Futures options
    Chaitanya, uwe and Timo like this.
  11. uwe

    uwe Well-Known Member

    In the column that assumes mid prices (AA - AC) - why is SPX more expensive than SPY? SPX should be 1/10th of the contracts and so only 1/10th of commissions.
    Yes, the spread is very wide in RUT and SPX - but you will never even get it for the ask price. Try a limit order for the ask price - you will get a better price (for an combination order like a butterfly).

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