[Option_BWBs_and_Collars] the concept of "free butterfly combo"
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Eski Movsinuit
Dec 2, 2010, 12:13:43 AM12/2/10
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Hi,
I saw many discussion around this idea of "free fly".
For example: for stock ABCDE trading at 50, start with buying a BWB put 55-50-40 for a net credit of $0.5.
Later on, ABCDE rose to 55. Buy a 45-40 put spread for $0.5. Now, you have a 55-50-45 fly which costs you nothing and you have the potential to profit full $5 if ABCDE stops right at 50 on expiration.
Some people prefer leave that "free fly" on the table and let the "random walk" unfolds itself and then pocket whatever left on expiration. They feel this is a better way than selling out that 55-50-45 fly which could profit $0.8 right away. They feel, by doing this strategy in the long run, they are better off. Is it really making good logical sense or just a personal preference? Is it really better off one way or the other?
I just could not agree to the whole rationale here. For me, I will ask myself: if I have $0.8, will I purchase that 55-50-45 fly or will I keep it in cash or buy something else? If my analysis on the stock ABCDE tells me NOT to buy that 55-50-45 fly, there is no reason to leave that fly on the table.
Eski
I saw many discussion around this idea of "free fly".
For example: for stock ABCDE trading at 50, start with buying a BWB put 55-50-40 for a net credit of $0.5.
Later on, ABCDE rose to 55. Buy a 45-40 put spread for $0.5. Now, you have a 55-50-45 fly which costs you nothing and you have the potential to profit full $5 if ABCDE stops right at 50 on expiration.
Some people prefer leave that "free fly" on the table and let the "random walk" unfolds itself and then pocket whatever left on expiration. They feel this is a better way than selling out that 55-50-45 fly which could profit $0.8 right away. They feel, by doing this strategy in the long run, they are better off. Is it really making good logical sense or just a personal preference? Is it really better off one way or the other?
I just could not agree to the whole rationale here. For me, I will ask myself: if I have $0.8, will I purchase that 55-50-45 fly or will I keep it in cash or buy something else? If my analysis on the stock ABCDE tells me NOT to buy that 55-50-45 fly, there is no reason to leave that fly on the table.
Eski
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Eski Movsinuit
Dec 3, 2010, 10:25:54 AM12/3/10
to option_bwbs...@yahoogroups.com
Hi Ross,
Let's use your example. The Fly is bigger that 2 SD. The Fly is worth of $2.00 now.
Case 1: You risked some initial fund and, either by luck or skill, you won that free fly now. Do you want to keep it?
Case 2: You did nothing. Now, do you want to pay, out of pocket, $2.00 for this fly?
It's the same $2.00. It's both your hard-earned money.
If you choose to keep in Case 1 but not buy in Case2. Why?
If you choose yes to both cases, you are no different than simply buying a Fly out of pocket.
Maybe, someone will say: I am using the "house money" to play a riskier play. The "house money" is NOT my money. They refer House Money to the money they won during the process. Well, if you consider your initial risk, that House Money is the same as your hard-earned money.
Any other comments?
Let's use your example. The Fly is bigger that 2 SD. The Fly is worth of $2.00 now.
Case 1: You risked some initial fund and, either by luck or skill, you won that free fly now. Do you want to keep it?
Case 2: You did nothing. Now, do you want to pay, out of pocket, $2.00 for this fly?
It's the same $2.00. It's both your hard-earned money.
If you choose to keep in Case 1 but not buy in Case2. Why?
If you choose yes to both cases, you are no different than simply buying a Fly out of pocket.
Maybe, someone will say: I am using the "house money" to play a riskier play. The "house money" is NOT my money. They refer House Money to the money they won during the process. Well, if you consider your initial risk, that House Money is the same as your hard-earned money.
Any other comments?
Eski
-----Original Message-----
From: rvd...@yahoo.com
Sent: Thu, 2 Dec 2010 06:28:56 -0800 (PST)
To: option_bwbs...@yahoogroups.com
Subject: Re: [Option_BWBs_and_Collars] the concept of "free butterfly combo"
The answer could depend on how much of the SD the the Fly covers.
If the Fly is bigger that 2 SD, then probability says leave it on.
Of course if it covers 1/10th of 1 SD , Id try for a few more free flys.
Also depends on what the market is doing.
I will say this, having a free fly also means having no risk.
This seems to screw up the trading psychology as you are mostly trading offensively, instead of defensively. In a choppy market one might keep from trading too long?
Any other comments?
Ross
Hi,
I saw many discussion around this idea of "free fly".
For example: for stock ABCDE trading at 50, start with buying a BWB put 55-50-40 for a net credit of $0.5.
Later on, ABCDE rose to 55. Buy a 45-40 put spread for $0.5. Now, you have a 55-50-45 fly which costs you nothing and you have the potential to profit full $5 if ABCDE stops right at 50 on expiration.
Some people prefer leave that "free fly" on the table and let the "random walk" unfolds itself and then pocket whatever left on expiration. They feel this is a better way than selling out that 55-50-45 fly which could profit $0.8 right away. They feel, by doing this strategy in the long run, they are better off. Is it really making good logical sense or just a personal preference? Is it really better off one way or the other?
I just could not agree to the whole rationale here. For me, I will ask myself: if I have $0.8, will I purchase that 55-50-45 fly or will I keep it in cash or buy something else? If my analysis on the stock ABCDE tells me NOT to buy that 55-50-45 fly, there is no reason to leave that fly on the table.
Eski
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Eski Movsinuit
Dec 5, 2010, 12:31:19 PM12/5/10
to option_bwbs...@yahoogroups.com
Quote"I want to keep this fly, since it has a high prob to earn more"
Do you mean, if you hold the fly longer, the fly has a high probability to be more than it's current price $2?
If yes, with good money money management, why don't you allocate more money to this position?
(For example, for this particular stock, my money management tells me I can afford to trade 10 contracts. After "testing the water" with 1 contract size and getting 1 free butterfly, if the outlook for this fly is promising, I should now buy more with debit $2. )
It's all up to my outlook on this fly or this stock. On the other hand, if the outlook of this fly does not justify leaving $2 on the table, I will liquidate that free fly and pocket the profit $2.
Do you mean, if you hold the fly longer, the fly has a high probability to be more than it's current price $2?
If yes, with good money money management, why don't you allocate more money to this position?
(For example, for this particular stock, my money management tells me I can afford to trade 10 contracts. After "testing the water" with 1 contract size and getting 1 free butterfly, if the outlook for this fly is promising, I should now buy more with debit $2. )
It's all up to my outlook on this fly or this stock. On the other hand, if the outlook of this fly does not justify leaving $2 on the table, I will liquidate that free fly and pocket the profit $2.
Eski
-----Original Message-----
From: rvd...@yahoo.com
Sent: Sat, 4 Dec 2010 16:45:26 -0800 (PST)
To: option_bwbs...@yahoogroups.com
Subject: Re: [Option_BWBs_and_Collars] the concept of "free butterfly combo"
I want to keep this fly, since it has a high prob to earn more, and because I am not finished trading the position.
I would actually ignore the fly for a few moments while I decide what action to
take next and then before I take any action(make more trades) I would look at the free fly and determine how I can revise my current plan to encompass the strikes of the free fly if possible.
Why? Because I like to keep the trade as simple as possible.
Would I buy the current fly at $2? Nope, but I might trade into it again just as I did before
or in another way perhaps?
How about you?
Ross
--- On Fri, 12/3/10, Eski Movsinuit <eskimo...@inbox.com> wrote:
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