TLT, Flanking butterflies

[Davidkot81 11]

New Analysis: Flanking butterflies. In this environment, with low IV pervasively affecting all of us, there is low volatility generally in the index funds and in the bonds. For TLT, I hypothesized that selling flanking butterflies (c. 1 standard deviation from current price), 6 or so strikes wide, might be profitable.
 
There is more risk here than other trades, since if the price falls exactly in the middle of the sold butterfly in one of the spreads, the max loss is 3-4 K minus the credit received (usually about 1 K). This though hasn't happened yet. To further minimize the risk, can see what happens with longer duration and also tighter spreads, for a future analysis. Recommend at least 20K if trying this strategy, and again just for learning, not a recommendation.

 

Edited September 5, 2016 by Davidkot81

[Kim 8,037]

Thanks for sharing. Few questions: 

 

You mention 6 strikes wide, but comments under the P/L chart say 3 strikes wide.

35% of max gain - can you give an example? 

You mention 45 DTE, but 6/28/2016 entry doesn't have 45 DTE.

Also, could you please include the debit paid?

Could you clarify the strikes for 5/31/2016 trade? 126 and 135 is 9 strikes. And I don't see how you could make a gain on this one, after TLT increased to 140+.

 

Thanks!

 

Also, what is the stop loss?

[Davidkot81 11]

Hi Kim

Sure-  so six strikes wide would be for example: 

sell 1 lot of the 127 strike

buy 2 lots of the 130 srike

sell 1 lot of the 133 strike

Two flanking butterflies are sold so a credit is received (no debit)

My goal was to exit the trade once 35% of the credit received as attained

In this backtest there is no stoploss.  You could consider a 1.5x credit received stoploss, or increased duration of trade to say 90 dte, and I will work on backtesting these.

 

as an example take the May 31 trade, where a six wide butterfly was sold around the 126 strike and the second butterfly was sold at the 135 strike. Therefore you would for example sell one lot of the 123 strike, 2 lots of the 126 strike would be bought, and one lot of the 129 strike would be sold.  A second similar butterfly centered at the 135 strike would also be sold (sell 132 strike x1, buy 135 strike x2 and sell 138 strike x1).  

 

For this backtest all options traded were calls.

 

 

 

 

 

 

Edited September 5, 2016 by Davidkot81

[Kim 8,037]

Interesting. You are basically betting that TLT will stay relatively unchanged OR make a big move (beyond the outer strikes). But to realize any decent gain, you have to hold till expiration, and to me, this is a big issue. 

 

Just to clarify: if you get 1.00 credit on 3.00 width (meaning you effectively risk 2.00, and you exist if you can close it for 0.35? That means 0.65 gain, or 32% return on 2.00 capital. Correct?

[Davidkot81 11]

I get out if 35% of max credit.  Probably better to get out if 0.5x credit loss but I need to re-backtest, since this backtest did not have a stoploss component.

The credit is typically 0.8 to 1.2 or so (estimated) so approximately correct, yes that you aim for $350 for a risk of $2000 which will significantly improve the chance of success  However unfortunately your buying power reduction is about $5000 because you cant send a six legged spread.  Since TLT cannot be in the middle of both butterflies at expiration you get double the credit for really only the risk of one butterfly or about $2000 max loss.  By looking at the deltas, the chance the price will land on the danger areas is about 35% at expiration without management.

 

In most cases, gains are realized about 1 week before expiration.  It might be also reasonable to get out the week before expiry for all occurrences, or at least look at the losers (so far none) and find and get out before a drawdown in the short butterflies.

 

To be conservative this would give you a gain of about $375 with about $2000 of loss potential and $5000 buying power reduction or about 7.5% on your 5000 after about 40 days. 

 

Without managing at 35% Likely results in loss (chance of loss is probably about 35-40%)

 

 

In other simulations, managing at 35% of profit probably cuts the risk to about 18% but more backtesting is needed.

Edited September 6, 2016 by Davidkot81

[Davidkot81 11]

Doing this trade in options on bonds (/ZB) is much more favorable and you can get portfolio margining (bpr for me was $55, with true risk of $2100).  Credit received was $900.

 

also day by day there can be variation in the credit (some

days terrible and not tradeable, others more generous than average)

Edited September 6, 2016 by Davidkot81

[aiti 3]

Hi Davidkot81,

I played your first tradeexample  9/2/2015 to 9/4/2015  with each 10 flys of 115 and 127 with ONE-Software.

First I have done it with all flies in call, but there I will get the 99-delta-issue. But I received your p/l of around $ 400.

Then I played it with the 115-put and the 127-call flies without the 99-delta-issue. The result is a loss.

With OTM-flies (1 STD and 45 DTE) in two or three days you will have only minimal price change if the underlying is not moving very large.

On the other side with 2x 10 Flies = 80 options in and out, you will have commisions of around $ 160 +/- for the complete trade. 

aiti

[Davidkot81 11]

Thanks for the feedback aiti

Commissions are not included in my model and would be about $150 in tos with no ticket charge.  Maybe about $90 in IB though.  Total number of contracts is 120 round trip, corrext.

I used all calls.  This can bring up possible assignment issues if there is a dividend for TLT.  Not aure I understand the "99 delta" issue.

you need to hold the trade at least 30-40 days to realize gains.  Precisely how long is still a matter of study I am worling on...

 

correction* 160 total contracts so $120 in IB and either $200 or $160 in TOS depending if you have ticket charges

 

 

Edited September 6, 2016 by Davidkot81

[aiti 3]

Hi Davidkot81,

I named it the 99-Delta-issue because in ONE the deep in the money options get a delta of 99,99. If you have some of these options in your combo the t+0-line in the risk-profile is getting wrong.

 

aiti

[greenspan76 345]

@Davidkot81 I don't know that this really changes that much in analyzing the trade, but you should have 160 total contracts round trip (not 120 contracts), which should be around $120 in commissions roundtrip in IB. Each fly is +1/-2/+1, so that's 4 contracts. Since you're trading 10 each centered on 2 separate strikes, that's 20 total butterflies, so 80 total contracts. Roundtrip makes 160.

[Davidkot81 11]

Yes sorry I added it up incorrectly, 160 total contracts is correct

$200 total commission for TOS and $120 for IB