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
Great video. Any chance you would be willing to tell us how you built up this position, trade by trade? It would really help me understand how the adjustments work, when they should be done, and when to open new positions.
Joe
Thanks for posting the adjustment part!
At a point in the video you say that you need to buy the credit spread you sold Immediately- I think you did not mean that- you would oviously buy it back after some time decay.
I also see 2 other butterfly positions- did you create this over time in the same way(ie buyinga bwb and purchasing the credit spread back to make it symmetrical)
I would really appreciate if you could email the notes you have on this entire trade.I understand that it is not always possible to make it totally risk free-but that is the ultimate goal!
Would you recomend using 1/3/2 butterflies and do the same thing-make the butterfly symmetrical after passage of time!
Thanks, for the broken wing – i have AIG stock and like the long term so I am hoping to apply some of your strategy to this. Is this an ok platform.
Thanks
Roger,
I have traded BWBs on only 2 products. I learned to trade them using the MNX; GLD is the only product I trade them with now. It’s not right or wrong, it’s just what I have found that works for me.
On the 1/3/2 ratios. All I can do is say that I’m sure it will work, but I don’t trade them using any ratios other that 1:2:1
Broken Wing Butterflies are really Back Ratio Spreads with a leg of protection. Using other ratios will certainly work and if you are willing to take the time to practice, they will become effective for you. Always make certain you have a limited risk trade! Back Ratio Spreads are actually limited risk, but your margin will not reflect it as such. If you don’t know what I mean by that, please do not trade them.
Always use proper money management – Control Risk First.
Hi.
thanks for your wonderfull videos about this exciting strategy of BWB.
you said that you are going to share more info about them, how to select the spreads and make multiple trades.
where can i have access to that_
Good day. Very cool website!! Guy .. Excellent .. Superb .. I’ll bookmark your website and take the feeds additionally…I am satisfied to locate numerous useful info right here within the post. Thanks for sharing..
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
Hi-
Great video. Any chance you would be willing to tell us how you built up this position, trade by trade? It would really help me understand how the adjustments work, when they should be done, and when to open new positions.
Thanks for your help.
Joe
Thanks for posting the adjustment part!
At a point in the video you say that you need to buy the credit spread you sold Immediately- I think you did not mean that- you would oviously buy it back after some time decay.
I also see 2 other butterfly positions- did you create this over time in the same way(ie buyinga bwb and purchasing the credit spread back to make it symmetrical)
I would really appreciate if you could email the notes you have on this entire trade.I understand that it is not always possible to make it totally risk free-but that is the ultimate goal!
Would you recomend using 1/3/2 butterflies and do the same thing-make the butterfly symmetrical after passage of time!
Thanks, for the broken wing – i have AIG stock and like the long term so I am hoping to apply some of your strategy to this. Is this an ok platform.
Thanks
Roger,
I have traded BWBs on only 2 products. I learned to trade them using the MNX; GLD is the only product I trade them with now. It’s not right or wrong, it’s just what I have found that works for me.
Steve K,
Yes, I route the trade to buy back the embedded – I route it as a GTC immediately after BWB is filled.
Sorry if I wasn’t clear on that.
Owen
On the 1/3/2 ratios. All I can do is say that I’m sure it will work, but I don’t trade them using any ratios other that 1:2:1
Broken Wing Butterflies are really Back Ratio Spreads with a leg of protection. Using other ratios will certainly work and if you are willing to take the time to practice, they will become effective for you. Always make certain you have a limited risk trade! Back Ratio Spreads are actually limited risk, but your margin will not reflect it as such. If you don’t know what I mean by that, please do not trade them.
Always use proper money management – Control Risk First.
Owen
Hi.
thanks for your wonderfull videos about this exciting strategy of BWB.
you said that you are going to share more info about them, how to select the spreads and make multiple trades.
where can i have access to that_
thanks for everything
mauricio
Good day. Very cool website!! Guy .. Excellent .. Superb .. I’ll bookmark your website and take the feeds additionally…I am satisfied to locate numerous useful info right here within the post. Thanks for sharing..