Comparing Butterfly Trading Strategies

you will love this segment today if you like butterflies at all this is um a little bit of a game changer so guys did an amazing job let's go through it as a strategy a butterfly looks to take advantage of non movement of an underlying essentially we put on a butterfly when we put on a butterfly we're placing a bet that the price is going to say in a relatively tight range around our short strike is you can put a butterfly on above the market to pay a little bit directional you could put a butterfly on below the market you can you know lots of different things you can do a variation to a standard butterfly is a broken-winged butterfly which gives the trade a slight directional assumption meaning that you finance the butterfly with a short call spread you finance the butterfly with a short put spread in our world of kind of what we call skew we'd much prefer to finance a butterfly in in 90% of the situations with a call spread because call spreads are expensive especially in a market that's near maybe a market top you definitely want to finance a butterfly with a short call spread correct I mean if you're going to go in protecting right you want to pay for it right has a very low probability of success let's go next I pay out when we buy a broken wing butterfly we're essentially buying butterfly and financing was selling an embedded call spread ideally we look to do a broken wing butterfly for credit we even traded one yesterday didn't we and um we look to it until we look to it we fill it I thought we filled it can't you die think you did I never okay I'll check I just camera roll of different transmission when we buy Brooklyn I'll go head next slide please so these are some examples of call spreads butterflies and Brooklyn butterflies and we've done this before this is not what this this segments about today but I just did yes anyway right through for even fifty to fifty five sixty right correct perfect let's talk for a little bit about on this particular we've shown this before let's just explain what it is so broken wing butterfly at the left hand side of the page we just took a twenty let's just say we took a $22 stock here so a broken wing butterfly is your long the twenty one short to 22 s escape the 23 s and your lawn the twenty fours a butterfly is long one short to long one and you're always short the at-the-money strike and then it calls spread is just selling and out of the money you know selling the 2324 all a broken wing butterfly is which is that which is the segment on the left is taking the two that are on the right the butterfly on the call spread and combining them let's go through the process in a butterfly you're along the twenty one strike you're short the twenty two strike and you combine that with the call spread where you're you're short two twenty three long the twenty four and in the butterfly you're long the twenty three they offset so you end up with one two skip one long one correct so long one - to skip one where you're flat long one that's the broken wing butter so we would like to do the one on the far left for even or a credit in a perfect world that's correct now when do you choose brooklyn butterfly when do you choose butterfly when do you choose call spread because how do you know what to do let's go next slide so to test which strategy is more effective we conducted a study looking at a two-year period in gold GLD because gold's been all over the place beginning at the first of the month we mechanically place a two strike wide because gold is a expensive stock skin two one strike why we did a two strike wide at the money butterfly at the money butterfly and at the money broken wing butterfly with 45 days to go to expiration and we took it to expiration now here are some incredible results let's watch so in GLD when we just bought butterflies outright we lost $380 doing one lots won lots over two years our win percentage was 8.33% we had two out of 24 wins now before you think that's bad let's I'm going to show you it's exactly right in a second and in the broken wing butterfly we made seventy-three dollars with an 80% win rate and nineteen out of twenty four using the exact same strikes some amazing results it really is over two years I'm such an idiot you're an idiot every one of our friends is idiots because we spent half our freaking curve what is love half our lives no more than 65% of our lives we spent doing this stuff and never once did we say hey each one of you guys give me a thousand bucks and we will commit to researching this stuff to see what we should do because we're sitting there with giant butterflies for a hundred years right and never once doing the research to determine if we had sold call spreads against the million butterflies we'd on millions of butterflies on time that what our win rate would be correct I saw this last night I want to get sick because I'm like Tim you know I just I can't believe how smart we thought we were and how and how in addition we really were well we would hire somebody because we thought they had certain abilities but we never like if somebody walks in our office for years years years and said hey um cuz people were dropping off resumes every day sure and people came in some hey I'd like a job in and if they were a data scientist we'd laugh at them of course you're a data scientist get out of here right what could we do with a data scientist what am I gonna do with a data scientist essentially okay and little did we know okay we were hiring somebody based on the fact that they played you know Division one I was just gonna say cuz he cuz he played offensive line at some college you play defensive tackle you are big it's because they block out everybody in the pit okay yeah son would go away right I heard this one guy once he was he so he was the largest human being I've ever seen and I'm talking about like heavy I'm talking about the you know defensive lineman drafted in the first round of the NFL knew humongous yeah you know his his behind somebody's gonna take up a lot of space get a spot in the pit yeah nobody got a mess right I didn't think about the the kid that's Jacob sighs okay 140 pounds wring it out if I do a broken wing butterfly on it be significantly better than just butterfly in my position off so a couple of call spreads against this so instead of losing a couple hundred grand or whatever it cost to hire this one kid overtime with all his trading they made money yeah yeah bad yeah I need that hundred forty pound data scientist I never realized it at all it took me 30 years to figure it out but look at this in GLD the at the straight butterfly now you're thinking one out of 12 okay one at a 12-8 three 3% talk about being about 10% but really what does you know what do these butterflies trade for they trade for 15 or 20 cents they're $2.00 well I want right here here to be fair because we went 45 days out just let me show you this for a second go to GLD page just quickly because we're gonna run out of time this just freaked me out last night these results cuz I'm like oh you know I don't we're in November I'm in this case you got to go to go a little bit to November cuz it's like 58 Ida we'll look at them both but and and just go an at the money butterfly is the 125 25 now remember well volatility is okay in here I guess just look at a butterfly just for a quick second and we're go to two point why butterfly in GLD so 23 25 now people are attracted to butterflies because they're cheap and you get a lot of potential bang for your buck but look at this price you're 15 cents correct it's a $2 wide butterfly okay how let's say actually cost 17 cents to do it how many times the 17 cents go into two dollars but you're looking at you're looking well yeah but you're looking at about 8% like it's 8% that number is exactly 8% the chances of that butterfly making money based on that price is almost about 8 to 8 half percent right because you take and that's what was training for you take what you pay for a butterfly that's right by it by the width of the strikes to get what that's right now go back to go back to our slides for a second Linda please go back to slides and look at the number the wind percentage after 2 years it's just about 8% hmm it's amazing and it's it's just like it blew my mind when it's not on the numbers are right I just did four I just didn't know the P&L but people get attracted to that 15 cents back and make 15 cent I can risk 15 cents to make a buck 85 that's attractive but the broken butterfly now this I'm not saying that broken butterfly you know that's that's not a return that's going to blow you away of being right 19 out of 24 times and only making $73 because there's some losers in there sure but the win rate of 79% that's how you get better trading mmm-hmm correct and that's how you also get better in the process too and believing in what you're doing this was the end of my butterfly career last night at 4:30 when the guys showed us this or 4 o'clock when the guys show says I said that's the end of my butterfly cover 33 years every once in a while just picking a butterfly picking one picking one maybe for earnings whatever but other than that it's over just ended last night sad but true I'm a dumbass so are you because we because we didn't spend the misery loves company listen it's just this is the cool stuff okay this is the stuff that the next generation of financial media will deliver let's go to the next slide then I want to see how these two strategies compare during bullish bearish and neutral market conditions so we isolated we isolated these periods and applied both strategies to the spy here's what we found so we did falling two-sided and rising two-sided just you know obviously never let's say high IV neutral IV and low IV and we took the calendar years of Oh eight oh nine eleven and twelve and thirteen and just take a look at these crazy results um and of course remember butterflies um butterfly benefits from a market staying at its spot if you that's right the money butterfly that's why you got the hundred ten dollar profit and the the rising with the low IV no actually in in in this case here it isn't the IV just the relationship between IV and markets didn't I couldn't I couldn't get a read on that what's important out of this what my takeaway from this was that the broker wing butterfly there really isn't a market place we're the broken wing butterfly like like hi IB low IV rising markets falling markets there's really no time not to eyes it that's right it there was no argument to make for for just doing a butterfly yeah I couldn't what we said is let's look at everything from return on capital to implied volatility let's find the wholeness mmm-hmm and we couldn't we couldn't find we're not embedding this short vertical spread the short credit spread made sense it's good good point good point I mean we're not trying to pick pennies on on plus six dollars minus forty dollars plus nine dollars whatever it is but the return is over three times as great using the broken wing butterfly that's it period game over sure it doesn't matter what the volatility was it doesn't even matter what the market was doing okay it's game over because markets go up markets go down markets a sideways it didn't matter it was game over choice of strategy let's go next one taking on additional risk with the Brooklyn butterfly vastly improved our probability and saw an increase in PL the Brooklyn butterfly when compared to a regular butterfly in different marking systems proved to be consistently the best strategy like I said I put to bed my butterflies last night so it doesn't mean you're gonna sell butterflies right oh never

Channel: tastytrade

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Id: geINXlqWR38

Length: 11min 28sec (688 seconds)

Published: Wed Sep 18 2013