Premium: Buying Butterfly Spreads

Transcription

1 In Part 3 of our "Premium" series,* we test butterfly spreads to see how this low probability / high profit-potential strategy performs over many occurrences. * Market Measure, Premium: Why Selling it Works, Oct 23, 2014 * Market Measure, Premium: Selling Straddles, Oct 28, of 9

2 NOTE: For new tastytraders...! A traditional butterfly is a neutral strategy; the belief is that the stock will stay within a range by expiration! Sell 2 at-the-money, and buy 1 in-the-money and 1 out-of-the-money (all calls or puts)! We never sell butterflies, we buy them! The higher the volatility, the cheaper the butterfly 2 of 9

3 Study 1! SPY: Bought a butterfly every 5 days for the past 5 years! Used expiring month closest to 45 days until expiration! We tested various wing sizes based on a percentage of the underlying price (see next slide for an explanation) 3 of 9

4 Study 1 In the following butterfly (from dough.com) Each wing is $5 wide (i.e. roughly 2.5% of underlying price on each side of the spread) This first study, we vary the size of the wings. 4 of 9

5 Results* 5% wide 10% wide 15% wide % of winners 42% 53% 59% Average trade P&L $0.40 $43 $58 Average winner $216 $290 $312 Average loser -$162 -$238 -$289 Max win / loss $491 / -$504 $749 / -$795 $896 / -$1474 Total P&L $96 $10,651 $14,377 * buying every 5 days for past 5 years (260 total occurrences) 5 of 9

6 Study 2! Next, we examine how implied volatility rank (IVR) affects the profitability of the strategy! We also examine 5 years of daily butterfly spreads using the same stock (SPY) 6 of 9

7 Results* Below 50 IVR (at expiration) Above 50 IVR (at expiration) 10% wide % of winners 53% 67% Avg. trade P&L $20 $152 Max win / loss $1378 / -$832 $752 / -$733 15% wide % of winners 57% 77% Avg. trade P&L $27 $284 Max win / loss $1982 / -$1498 $896 / -$693 * Buying every day for past 5 years (1100+ total occurrences) 7 of 9

8 Take aways! Wider spreads have greater probability of profit; they also carry greater amounts of risk. The cost paid for the spread is minimized with greater implied volatility. Average amount paid Wing Span 5% wide 10% wide 15% wide Below 50 IVR Above 50 IVR $235 $221 $724 $523 $1268 $977 8 of 9

9 Take aways (continued )! Butterfly spreads are a high implied volatility strategy the spread is best taken when the cost of the spread is minimized compared to the probability of profit 9 of 9

10 DISCLAIMER: The purpose of this material is to demonstrate market trading techniques and strategies designed to give you the skills and confidence to manage your own investments. The risk of loss in trading securities, options, futures and forex can be substantial. You must consider all relevant risk factors, including your own personal financial situation, before trading. Options involve risk and are not suitable for all investors. You are assuming the entire risk of any and all trades placed in the stock market. Due to the time- critical nature of trading, the varying fees charged by brokerages, and the activity of other market participants, tastytrade cannot guarantee that similar trades you place will mirror the exact performance of the tastytrade portfolio. tastytrade is not a licensed financial advisor, registered investment advisor, registered broker-dealer or FINRA SIPC NFA-member firm. tastytrade does not provide investment or financial advice or make investment recommendations. tastytrade is not in the business of transacting trades, nor does tastytrade agree to direct your commodity accounts or give trading advice tailored to your particular situation. Nothing contained in tastytrade s portfolio demonstration constitutes a solicitation, recommendation, promotion, or endorsement of any particular security, other investment product, transaction or investment. BY USING THE TASTYTRADE WEB SITE AND ACCESSING THE TASTYTRADE MATERIALS, YOU AGREE, AT ALL TIMES, TO INDEMNIFY, DEFEND, AND HOLD TASTYTRADE (INCLUDING ANY OF ITS AFFILIATES, OR ITS RESPECTIVE SUCCESSORS AND ASSIGNS, OR ANY OF ITS RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, REPRESENTATIVES, LICENSORS, OPERATIONAL SERVICE PROVIDERS, ADVERTISERS, OR SUPPLIERS) HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, ACTIONS, DEMANDS, SUITS, LOSSES AND COSTS (INCLUDING ATTORNEYS FEES) RESULTING FROM TRADES YOU PLACE IN THE MARKET. TASTYTRADE SHALL NOT BE LIABLE FOR ANY LOSS OR DAMAGE, OF ANY KIND, DIRECT OR INDIRECT, IN CONNECTION WITH OR ARISING FROM USE OF EDUCATIONAL SERVICES PROVIDED AS PART OF THIS PORTFOLIO DEMONSTRATION.