This makes so much sense when shown like this. Joe would send out risk graphs but that did fully explain the trade, only the resulting position. Seeing it live and then observing how the risk graph changes after the embedded vertical is bought back made things click. One point you make near the end is that you need time for these trades to work. I was thinking of adding one to my April inventory but there is probably not enough time, these trades require time to work properly.
I think Alex was the only person to ever talk butterflies. When you state that the final March trade uses no margin, I am reminded there is no margin on a butterfly, only a debit; but when traded using this strategy, the result is a Butterfly that somebody paid you to own!
This is powerful and there will be more good things to come.
This is a very good way to show how to build up a position over time to make money with a very high probability to win.
I know Owen likes to buy BWB with ratios of 6 to 3 and I like to buy 8 to 4 sometimes to give me quicker time decay on my BWB.
Another point is there is no reason you can not use some positions for a quick profit and other to buy back the “embedded” to build up positions.
Another point about Butterflies and Broken Wing Butterflies. These strategies are perfect for a high volatility stock or ETF like GLD. Sell the BWB when volatility is high and buy back when it is low.
Hi Noel,
If the trade is in-the-money 4-10 days prior to expiration, I begin to look for an exit point. With any trade where you are short strikes, you are “cheering” for the underlying to land at the short leg of the trade. For example, if you own a butterfly, the most value the fly will amass is if the underlying is trading right in the middle (at your short strike).
I don’t hold these until expiration unless they are way out-of-the-money. For example, in MAR I had butterflies where I was short the 101, the 102 and the 104 strikes. I allowed all those to expire worthless and kept the original premium I collected. They were far enough OTM (out-of-the-money) that I wasn’t concerned. Ideally, if GLD had traded down to one of those short strikes, that butterfly would have gained in value, so I had no reason to sell them prior to expiration. If GLD would have traded down to say, 104, then my Long 106 Puts would have gained $2 in value while the short 104 strikes would remain worthless. (assuming a close at or above 104).
So the rule is: Don’t hold ITM (in-the-money) spreads into expiration. If you do, you will be assigned the underlying and while that’s certainly not the end of the world, it is not the objective of this trade style.
Thanks for the reply, the light bulb has just switched on !! Love your video’s on BWB’s I’ve been looking at them for some time on TOS, the risk reward seems better than vertical spreads. Can I ask you about any adjustment strategies you might use if the trade goes against you. Using TOS I have tried several adjustments but I’m concerned about putting in more good money after bad. Do you think an adjustment strategy is a good thing for a BWB or just close the trade for a % loss.
Cheers
Noel
Perth Australia
This makes so much sense when shown like this. Joe would send out risk graphs but that did fully explain the trade, only the resulting position. Seeing it live and then observing how the risk graph changes after the embedded vertical is bought back made things click. One point you make near the end is that you need time for these trades to work. I was thinking of adding one to my April inventory but there is probably not enough time, these trades require time to work properly.
I think Alex was the only person to ever talk butterflies. When you state that the final March trade uses no margin, I am reminded there is no margin on a butterfly, only a debit; but when traded using this strategy, the result is a Butterfly that somebody paid you to own!
This is powerful and there will be more good things to come.
Owen,
This is a very good way to show how to build up a position over time to make money with a very high probability to win.
I know Owen likes to buy BWB with ratios of 6 to 3 and I like to buy 8 to 4 sometimes to give me quicker time decay on my BWB.
Another point is there is no reason you can not use some positions for a quick profit and other to buy back the “embedded” to build up positions.
Another point about Butterflies and Broken Wing Butterflies. These strategies are perfect for a high volatility stock or ETF like GLD. Sell the BWB when volatility is high and buy back when it is low.
And yes you can trade this in your IRA…………
Joe F
What happens when this trade expires. I know GLD is not cash settled so how does the trade settle on expiration day ?
Hi Noel,
If the trade is in-the-money 4-10 days prior to expiration, I begin to look for an exit point. With any trade where you are short strikes, you are “cheering” for the underlying to land at the short leg of the trade. For example, if you own a butterfly, the most value the fly will amass is if the underlying is trading right in the middle (at your short strike).
I don’t hold these until expiration unless they are way out-of-the-money. For example, in MAR I had butterflies where I was short the 101, the 102 and the 104 strikes. I allowed all those to expire worthless and kept the original premium I collected. They were far enough OTM (out-of-the-money) that I wasn’t concerned. Ideally, if GLD had traded down to one of those short strikes, that butterfly would have gained in value, so I had no reason to sell them prior to expiration. If GLD would have traded down to say, 104, then my Long 106 Puts would have gained $2 in value while the short 104 strikes would remain worthless. (assuming a close at or above 104).
So the rule is: Don’t hold ITM (in-the-money) spreads into expiration. If you do, you will be assigned the underlying and while that’s certainly not the end of the world, it is not the objective of this trade style.
Thanks for the reply, the light bulb has just switched on !! Love your video’s on BWB’s I’ve been looking at them for some time on TOS, the risk reward seems better than vertical spreads. Can I ask you about any adjustment strategies you might use if the trade goes against you. Using TOS I have tried several adjustments but I’m concerned about putting in more good money after bad. Do you think an adjustment strategy is a good thing for a BWB or just close the trade for a % loss.
Cheers
Noel
Perth Australia