Broken Wing Trade & Adjustment Explained
March 18th, 2010
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by Owen · Filed Under: Broken Wing
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If that order expired at the value of 166 dollars how much cash would you actually net in your account? Thanks so much for the videos.
Hi Paul,
If I understand your question, you are asking about expiring options. If the options I sold for a credit expire worthless, then yes, I keep the credit received. The common joke is that every options trader wants and “Expire Now” button on his trading platform. Sell Options – Click Expire NOW!
Hope that helps.
Owen
Hi Owen,
Thanks for the great video, just need to check with you, once we have placed the BWB, usually how many days later then we place the embaded trade? Thanks.
Chin
Hi Chin,
Once the BWB order has been filled, you route a GTC to buy back the embedded. So, for example, you route a BWB on GLD for JUL – You sell the 116/114/110 @ .60 cents credit. Once that trade is filled, you route a GTC to buy the embedded 112/110 vertical for about .23 cents debit. As GLD moves higher and time decays away, the vertical will [hopefully] fill and you will be left with a symmetrical butterfly having pocketed the .37 cents and have a “lottery” ticket at the 114 strike for JUL.
Make it a Great Day!
Owen
Hi Owen,
Thanks for the quick response, this is one of the fantastic way to trade. Always like low risk trade ideas. Thanks again.
Regards,
Chin
Hi Owen,
There are two versions of BWB’s, the skip strike and unbalanced. Your approach is the skip strike. Is there an advantage to that versus the unbalanced? An unbalanced approach using your example would be a 116/114/112 with the contracts in a ratio of 1/3/2 respectively. My analysis shows for the same margin amount you can get more of a credit with an unbalanced. You can still buy back the 114/112 embedded vertical at a profit to create the symmetrical BF. Any thoughts?
Thanks,
Chuck
Thanks for the informative series of videos on the BWB. It seems there is a paucity of information available in the available literature covering this particular options strategy. Are there any resources you can recommend to provide additional details on the BWB?
Thank you,
Eric
Chuck,
Sorry for the delay in getting back to you. Yes, you are absolutely correct, there are other methods beyond Skip Strike. I thought we would begin with the Skip Strike because it is the easiest to understand. You are 100% correct in that the unbalanced ratio you outline is limited risk and will produce similar results. As we move forward with this study, I intend to include these unbalanced spreads along with the adjustments. If you wish to share your knowledge now, by all means, jump in there and post away! I welcome your effort and comments. Thanks!
Owen
Eric,
I just sent you an email.
I also took a look at your site, very nice, very impressive!
Make it a Great Day!
Owen
Thanks Owen,
I would be glad to share my knowledge, but it’s mostly just the mechanics of setting up various BWB’s etc. Still searching for more info on what setups to look for (what strikes, puts, vs calls), how and when to adjust vs. get out with a small loss etc. For instance your no-risk, no margin BWB on GLD for March expiration is very compelling but picking the correct strikes to start with, how to adjust if it goes against you (as opposed to targeting the vertical to adjust into when it goes your way) and then how to add additional positions to the trade to get into a position similar to your GLD. I would love to see the resource recommendations you emailed to Eric.
Thanks,
Chuck
Owen,
Your video shows how to set up a BWB trade but doesn’t show how you got into the final position after multiple adjustments. Also you don’t mention what to do if the trade moves against you and you are unable to buy back the embedded vertical. Where did you learn the adjustment techniques you use in the BWB trades? I have been searching the web for this info (like Eric), but have not found much.
Tim
Hi Tim,
First I’ll address risk management. You must access risk before putting on this trade. If the trade moves against me, there is no adjustment, I have established risk parameters before going into the trade. Allow me to digress slightly; there are numerous “Educational firms” in operation today who will lead everyone to believe there are some super-secret trade management/adjustments. Adjustments exist, but they’re not nearly as sexy as they sound. Access risk before placing any trade and be prepared to lose that entire amount should the trade move against you.
To get into the final position, which is the symmetrical butterfly, you buy back the “embedded” vertical that was sold to finance the trade. BWBs contain a short vertical (that is not obvious) within the position. For example: You sell the 110/108/104 Put Spread. Write this down on a piece of paper and follow me, it’ll become obvious in just a minute.
You are really doing (2) different trades here.
Trade 1: Buy the 110/108/106 Butterfly.
Trade 2: Sell the 106/104 Vertical.
Now, notice that the 106 strikes overlap; you are buying the 106 strike in Trade 1 and selling the 106 strike in Trade 2. There is your embedded vertical. As the market moves and theta decays, that vertical will erode in price from +/-$1.00 down to +/-$.25 (or so) cents. Selling that vertical is what allows us to get these trades on for a credit amount.
There is not much (good) information available online. I’m not an expert, I’m just someone who has traded these for a while and have come to understand them better. Part of the reason for creating this site was to learn more through teaching. I believe that if you teach, you learn.
Make it a Great Day!
Owen
Owen, your videos are very informative. I am a BWB newbie who is currently trying to build BWB positions on GLD based on what i’ve seen on your site. I am bullish on GLD for as long as US Debt and unemployment remains high. So far, I have Dec 127/131/133 Put Spread BWB put on for -.65 credit. I understand the whole concept of buying back the embedded for less than the credit as the underlying moves upward in price and time decay eats in, thanks to you. As this happens (underlying moves up considerably and BWM is now symmetrical after embedded buyback), I’m assuming you establish a chain of more BWB butterflies and do the process all over again? How many more new broken butterflies do you usually keep on adding as underlying moves fwd? I would like your collective insight on this. Also, would it be a good idea to use calendar spreads for the downside as well as to mitigate volatility risk?? I would appreciate your response when you have the time. Thanks. Please email me when you get the chance.
Hi Sean,
You have the right idea; the concept is to build a risk graph that produces an “Umbrella” under which you establish a large range of profitability. I am unable to answer your question about how many additional positions to establish; that’s really something you must undertake as part of your risk management. Determine what percentage of your portfolio you wish to expose to GOLD and apply that percentage to your BWB positions. Of course, as you buy back the embedded verticals, you are removing that risk and therefore freeing up capital/margin for additional positions.
Once you determine your risk tolerance, then consider the following:
I add to my Long Delta positions when the underlying has either pulled back to a level of support or a widely used moving average, such as the 10, 20 or 50ma. Institutions tend to add to their positions at these various levels. (assuming they are accumulating).
I have been hesitant to get longer deltas in GLD with this parabolic move to the upside. At this particular moment, shortly after 9am Central time, we are seeing a potentially bearish candle forming on the daily. It is possible that we will print a Bearish Engulfing pattern which will need to be confirmed with a move lower tomorrow. If confirmed, I will be looking for a level of recent support where I can add positive deltas. Most likely that will be around the $128 handle, just below the recent gap. Another place to add to Long positions might be off the 10ma.
You clearly understand risk management when you speak of adding Calendars to mitigate risk. One typical way to utilize Calendars is to buy them in a 1:3 ratio at your short strike(s). The trouble with doing this on BWBs is that you will spend your profit very quickly; the way I manage risk is on the front side. I allocate capital risk before routing the trade.
Bear in mind that these are only my opinions and my personal strategies given my personal trading plan. Everyone must develop their own trading plan that fits their own particular needs, goals, objectives, etc.
Hope that helps – Make it a Great Day!
Owen
Owen, thanks for your response!! So far my initial spread has decayed from 65 cents to 37 cents. Why do you buy it back at 23 cents or so? What’s your the thinking behind this? Is it just to free up margin quickly for new positions? Is it just not worth waiting a bit longer to buy the embedded back at 5 cents or less? If i buy the embedded back now, am I just being inefficient?
Let’s say I haven’t bought back the embedded yet, but I want to establish a new BWB position farther up the strikes. In general, do you stick to the same formula of trying to get at least 60 or 65 cent credit for new positions? You wouldn’t even settle for 45 (or even 55) cents or less right? By the time these BWB spreads you want to put on don’t fit the “at least 65 cent” criteria, I think you probably start looking into the back months correct??
Also, for new positions, is it better to have the short strikes in close proximity relative to previously established BWBs? Or it doesn’t make a difference? I’m thinking the right way to do this is to not have the short strikes of position A too far away from short strikes of position B, and C, and so on. I’d like your insight on this.
Lastly, which commission structure do you use on TOS? Ex Rates 1/2? Standard? These 10 lots are squeezing a lot of juice out of my account commission wise, since I’m still on standard. When it gets close to expiration, don’t I have to sell back a lot of these transformed symmetrical Butterfly Spreads? I think this will eat more of my account value…which is why I’m thinking mabye I need to widen out the width of the spreads? Or you only sell the flys that have ITM status, and the let the others expire worthless right? with a fairly large account. I’m watching your “how to close out butterly video” but still a little confused…
Sorry for the long post and late reply, I will keep you posted on to any new additions I make on GLD. Right now, it’s 134.73 as of this writing. I’m tempted to add more bullish BWBs in december, but havent made any moves yet, since I’m still relatively new at this, but learning fast I think!
Thanks for your help too. I am trying to make a decent living trading options, and so far I have tons of headaches…..
Very interesting & educational video Owen. I see you use TOS. I have paper traded BWB with TOS for a little bit but I haven’t used any real money yet. I know that TOS always uses the mark prices on these option spreads. In your experience in trading real money with TOS, if you place limit orders at the mark do you always get filled, or is using the mark price just an unrealistic fantasy? Please advise. Thanks.
Hi Rob,
The TOS platform routes all orders, by default, as limit orders. There are days when I route a BWB and it works all day without being filled, but I always route at the mid-point using limit orders.
Owen