Butterflies vs. Iron Condors

[Guest]

I know I sound like broken record, but I think that SO should include income butterflies into toolbox. Dan Sheridan is also big on this strategy. The flies have a very good feature that they win when IV drops. And they are very stable in pricing.

[Kim 7,499]

I know I sound like broken record, but I think that SO should include income butterflies into toolbox. Dan Sheridan is also big on this strategy. The flies have a very good feature that they win when IV drops. And they are very stable in pricing.

We are doing ICs when IV is high. Both are vega negative and are expected to balance the calendars and the straddles. Flies are a good strategy, but it doesn't really have any big advantages compared to ICs.

[Guest]

I have a little dislike for ICs, because they have sucky risk to reward ratio. These high probabilities are not to be trusted, due to well-known "fat tails". On the other hand if managed properly,  they probably offer ROI similar to flies?

[bam1960 53]

I know I sound like broken record, but I think that SO should include income butterflies into toolbox. Dan Sheridan is also big on this strategy. The flies have a very good feature that they win when IV drops. And they are very stable in pricing.

Alex

I opened nflx 435/450/450/465 fly along with Rut 1200 weekly calendar just something extra I do with SO trades

[Yowster 8,001]

I know I sound like broken record, but I think that SO should include income butterflies into toolbox. Dan Sheridan is also big on this strategy. The flies have a very good feature that they win when IV drops. And they are very stable in pricing.

I've used butterflies for cheap OTM bets on large moves in a given direction, usually out a least a few months.  However, I haven't used them for shorter term ATM trades looking for minimal price movement (I've  always used calendars for this as its less commission intensive).   I do sometimes use a variant of the butterflies as a post-earnings play on larger prices stocks - I open them OTM a few weeks to a month from expiration in a 1x3x2 ratio instead of the standard 1x2x1, typically collecting a small credit when I open the trade.  I'll use calls if I'm looking for more upside and puts if I'm looking for more downside - if the stock moves in the opposite direction I can usually close early and collect another small credit, if the stock moves in my desired direction toward my short strike then can make quite a bit of money, but if the stock moves away from my farthest strike then the trade can be a loser so I'd look to get out of the trade in this case.  I doubt that these will ever be official SO trades because they can be riskier, but these types of trades are sometimes discussed the the Directional & Speculative Trades Forum.

[Guest]

Alex

I opened nflx 435/450/450/465 fly along with Rut 1200 weekly calendar just something extra I do with SO trades

Yeah, that would be great if we could look at these, because I need this variety of trades to generate income. I always liked the idea to include b-fly in my toolbox. I was not doing them, because there was no good source of statistics, so if you have a good track record, may be you could provide some info.

[Kim 7,499]

I have a little dislike for ICs, because they have sucky risk to reward ratio. These high probabilities are not to be trusted, due to well-known "fat tails". On the other hand if managed properly,  they probably offer ROI similar to flies?

Alex, there is a negative correlation between risk/reward and probability of success - https://steadyoptions.com/articles/post/general/risk-reward-or-probability-of-success-r91. Fly is basically a narrow IC. IC can also have different risk/rewards, depending where you place the strikes. The wider the strikes - the higher probability of success, and worse risk/reward. IC has good risk/reward, but to book those fantasy land returns that you see on the P/L chart, the stocks needs to stay exactly at the middle strike, while IC can have much wider profit zone. As you mentioned, it ultimately comes to risk management.

 

You should never look at those trades as income generators. Bank interest is income generator. Dividend is income generator. Those trades are NOT. The fact that you get a credit, is irrelevant because you have no guarantee that this credit will stay in your account.

 

When you say flies - could you please clarify which flies do you mean? On indexes? Or stocks? In context of earnings?

[Guest]

I've used butterflies for cheap OTM bets on large moves in a given direction, usually out a least a few months.  However, I haven't used them for shorter term ATM trades looking for minimal price movement (I've  always used calendars for this as its less commission intensive).   I do sometimes use a variant of the butterflies as a post-earnings play on larger prices stocks - I open them OTM a few weeks to a month from expiration in a 1x3x2 ratio instead of the standard 1x2x1, typically collecting a small credit when I open the trade.  I'll use calls if I'm looking for more upside and puts if I'm looking for more downside - if the stock moves in the opposite direction I can usually close early and collect another small credit, if the stock moves in my desired direction toward my short strike then can make quite a bit of money, but if the stock moves away from my farthest strike then the trade can be a loser so I'd look to get out of the trade in this case.  I doubt that these will ever be official SO trades because they can be riskier, but these types of trades are sometimes discussed the the Directional & Speculative Trades Forum.

Perhaps we could look at how consistent are these ratio b-flies?

[Guest]

Alex, there is a negative correlation between risk/reward and probability of success - https://steadyoptions.com/articles/post/general/risk-reward-or-probability-of-success-r91. Fly is basically a narrow IC. IC can also have different risk/rewards, depending where you place the strikes. The wider the strikes - the higher probability of success, and worse risk/reward. IC has good risk/reward, but to book those fantasy land returns that you see on the P/L chart, the stocks needs to stay exactly at the middle strike, while IC can have much wider profit zone. As you mentioned, it ultimately comes to risk management.

 

You should never look at those trades as income generators. Bank interest is income generator. Dividend is income generator. Those trades are NOT. The fact that you get a credit, is irrelevant because you have no guarantee that this credit will stay in your account.

 

When you say flies - could you please clarify which flies do you mean? On indexes? Or stocks? In context of earnings?

I mean butterfly spreads only in the context of rules based entry and exit. SO has a fantastic set of rules for calendars and straddles. I guess b-flies can also be a part of these strategies. I have listened to a few Dan Sheridan webinars on weekly butterflies and he seems to be confident that this could be a successful strategy. Butterflies have good and not so good features. I like that they use significantly less capital at the onset of a trade and to lose everything you must wait until expiration and the price has to go beyond long wings. It is more commission intensive than IC, because in IC you can close only one side or let them expire. And of course, it is very much not possible to guess where the b-fly short strikes should be in order to realize maximum profit. However, it is very possible to get 10-15% ROI in shorter time frame than with IC. And with IC there is always this small probability of losing much more than the credit you received.

[bam1960 53]

Much more comfortable with rut calendars and have done well with them but nflx iron Bfly is a very small position and I am experimenting with it. Kim has a lot of info on past calendars we have done. Probably should move this discussion to iron condor and calendars. By the way I rolled the fly to 435/450/470/ 485 today when it spiked but I said I am keeping it small

[Kim 7,499]

I mean butterfly spreads only in the context of rules based entry and exit. SO has a fantastic set of rules for calendars and straddles. I guess b-flies can also be a part of these strategies. I have listened to a few Dan Sheridan webinars on weekly butterflies and he seems to be confident that this could be a successful strategy. Butterflies have good and not so good features. I like that they use significantly less capital at the onset of a trade and to lose everything you must wait until expiration and the price has to go beyond long wings. It is more commission intensive than IC, because in IC you can close only one side or let them expire. And of course, it is very much not possible to guess where the b-fly short strikes should be in order to realize maximum profit. However, it is very possible to get 10-15% ROI in shorter time frame than with IC. And with IC there is always this small probability of losing much more than the credit you received.

Any weekly trade can get 10-15% if the stock remains in the range for few days. That applies to calendars, ICs, flies. I don't see any real advantage to flies compared to ICs. Capital use depends on strikes. I listened to Dan webinars as well, even did few full courses. It looks very nice on paper, but not always so smooth in practice. We did some RUT and SPX weekly calendars when IV was much lower. Those trades are tough to do as part of a newsletter because the adjustments have to be very timely if the stock starts to move. The losses can be brutal if you "fall a sleep" and don't adjust on time. 

[Guest]

I am wondering if anybody here has a history of consistently following butterflies as part of their portfolio.

[Guest]

Any weekly trade can get 10-15% if the stock remains in the range for few days. That applies to calendars, ICs, flies. I don't see any real advantage to flies compared to ICs. Capital use depends on strikes. I listened to Dan webinars as well, even did few full courses. It looks very nice on paper, but not always so smooth in practice. We did some RUT and SPX weekly calendars when IV was much lower. Those trades are tough to do as part of a newsletter because the adjustments have to be very timely if the stock starts to move. The losses can be brutal if you "fall a sleep" and don't adjust on time. 

I think weekly index trades are higher maintenance because they have to be managed by the greeks and have to have stop loss attached at all times. I was doing SPX calendars for a while and did not know proper management rules, and of course I was killed by a huge loss because I did not close losing trade when it started going against me. Instead I was opening new calendars and increased my capital exposure until I realized that my loss became too big. I guess if I stayed within 10% limit as with SO, I would not feel that pain and would continue doing it and eventually be profitable.

[daviddream 23]

I love reading the posts here from veteran option traders. I have far less experience than most folks here, but I do agree with Kim. Options trading is not a place to generate income. When I joined this service I did it for the long haul to learn and grow with this trading community. The post-mortem commentary of a trade can be useful, but the tendency of traders to focus too much on losses is what leads to mistakes and miscues. I have made plenty over the years blowing up more than one account. If you have an edge, as we do here. I believe you move onto the next trade. I was a member of an option service that had only two losses last year thinking that was great, until I read a review from one of Kim's members (I assume) who talked about what could go wrong with these weekly far OTM credit spreads and how adjustments might magnify losses. Even though this service had not had this happen, another service with the same type of trades did blow up people's accounts. It went under as a result. So I did my research on SO and liked what I read. I appreciate the measured approach here and the intelligence of the community and know I will grow an account in the long run even if there are drawdowns over time. Thanks to all of the veterans who have the patience to answer questions from folks like me. Incidentally, I got out of the trades yesterday morning, not from some calculated move, but because I am on vacation and did not want to sit next to my computer all day. Sometimes there is luck involved in trading. I certainly have had it go the other way too many times.

[Guest]

The old fundamental understanding of what are income investments - savings accounts, bank deposits, treasury bills, dividend paying stocks etc. In the new world with historically low interest rates and QE in US and Europe and tremendous under-funding of IRAs there is a wide variety of systems offered in the market to help generate income with options and stocks. As we know, this must be treated as a business, where there is no guaranteed paycheck, but an opportunity of adding to one's net worth with systematic and controlled risk exposure. I believe that system like SO is the best shot at attaining this objective.

 

Once there is enough funds generated by this system, portion of the money can and should be funneled into long-term investments like bonds and dividend paying stocks. Until then we must accept that there will be months with little or no income and months with higher than normal returns to turn this project into a profitable business over longer period.

[bam1960 53]

These trades can be very risky and require on the spot management. i would not recommend people do them unless the time to watch them closely. I am not advocating these trades but I do think getting familiar with specific trades and repeating them will help with the outcomes. Personally I am not crazy about the butterfly generally but decided to try it on nflx just to play with it. But essentially so far I think I would have been better off Starting with the Iron Condor(less adjustments) rather than butterfly essentially because of commisions as yowster said with very small allocation. Higher risk means more stress and is probably not for everybody.Besides you don't have to do extra trades to make money, Kim has a great system here and I can vouch for it, I just like to experiment alittle with small positions to see if any of these approaches appeal to me. Plan to stay in trade for 3-4 days at most but like Kim says these flys have very narrow range high maintenance. Just my 2 cents.

 

Bret 

[Guest]

These trades can be very risky and require on the spot management. i would not recommend people do them unless the time to watch them closely. I am not advocating these trades but I do think getting familiar with specific trades and repeating them will help with the outcomes. Personally I am not crazy about the butterfly generally but decided to try it on nflx just to play with it. But essentially so far I think I would have been better off Starting with the Iron Condor(less adjustments) rather than butterfly essentially because of commisions as yowster said with very small allocation. Higher risk means more stress and is probably not for everybody.Besides you don't have to do extra trades to make money, Kim has a great system here and I can vouch for it, I just like to experiment alittle with small positions to see if any of these approaches appeal to me. Plan to stay in trade for 3-4 days at most but like Kim says these flys have very narrow range high maintenance. Just my 2 cents.

 

Bret 

I checked NFLX and it is at 452-453 level which is a perfect point to keep your IB @ 435/450/465. I don't see your point in trying to roll IB into an IC. You have probably paid debit to roll? I would just keep your IB until time decay would give you 10-15% and get out.

[bam1960 53]

It spiked yesterday to 464 so rolled to current position. Stick to plan, another would have been to buy single call option to reduce deltas but decided to roll.

[Kim 7,499]

Here are the main differences between fly and IC:

 

IC has wider profit zone, but less potential gain (if used wings wide enough)

Fly is likely to require more maintenance because there is profit zone is more narrow.

Fly will provide better results if the stock remains close to the middles strike.

 

Overall, there is no real advantage for one strategy over another. It all comes to risk management.

[bam1960 53]

Exited NFLX @4.50 debit for a 10.7% gain could have squeezed some more but decided since long weekend and entered trade on tuesday this week I was satisfied with it. Entered this trade as 435/450/465 Iron butterfly @11.00 credit, rolled to 435/450/470/485 Iron condor for a @5.48 debit that gave me @5.52 credit overall and 1.02 profit. My thinking was that after positive earnings stock spiked up and settled into a range and  was comfortable with trade.