Home › Forums › Market Discussion › Scaling add in flies/calendars: how to balance "when" vs "how much"
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March 15, 2016 at 10:44 am #4987MarcoParticipant
My topic refers to this trade, but i think it can be applied in any trade that is 1) scalable 2) delta neutral so makes money mostly on theta.
We are in a strange point, which is this one for me: .
The point in which we gonna add the third fly is 1100. I think we briefly touched that a couple of days ago, or at least we were really close to it.A fly, as well as a calendar, gets more expensive as the time goes by cause of theta decay. Between the scenario in which the russel breaks that high bracket, or the scenario in which breaks the very low break even point of the set we already have, the first is more probable. So why not adding the third fly a couple of days ago when it was touching that level?
March 15, 2016 at 3:12 pm #5009SureshParticipantAs mentioned in the chat room, adding OTM IWM/ RUT calls to the trade may help with an analgesia when the trade starts going against the plan. Steven mentioned that if the RUT keeps going up then remove the calls and buy/ add a 3rd fly. The 3rd fly will be at least partially financed by the calls that profited from the RUT going up. We use similar technique in ICs when there is tail risk to the upside. We remove the hedge and roll the threatened side up or down accordingly. So, questions then are when will be a good time to do this and should the expiration time of the calls be same as the flys or further out in time.
March 15, 2016 at 3:15 pm #5010MarcoParticipantMy guess is that if we get a pullback that doesn’t let us get out of the trade for the planned profit, we add the calls.
BUT…
We almost touched 1100 the 7th of march. Which is 1 week ago. And we could have added the third fly there. My question is, why didn’t we do so, beside the fact that it lower the overall profit of the trade.
March 16, 2016 at 9:48 am #5016Steven PlaceKeymasterThe most recent high on RUT was 1094, not 1100. When it comes to adjustments I don’t like to deal with “close enough” scenarios.
The funny thing about markets is that the second time a level is tested the higher the odds that it will fail.
So my feel on the RUT here is that if the market breaks 1100 it will rocket higher.
On top of that, the market has also undergone nearly 2 weeks of sideways action. Volatility has already compressed and vol could easily expand to the upside.
When you add that third butterfly, it will significantly increase your net short delta. You’ll basically be left with a pretty aggressive short position.
Now, if back in early March the market had rocketed past 1100 without any breather, I would have added. But we didn’t get that level.
With this trade, we get stuck in a position whereby we easily lose the “high ground” on the trade if the market rips. Because the trade was looking for reversion and we’ve already got that reversion, yet it really hasn’t been enough for it to be a profit.
On top of all that we’re headed into March opex which is historically bullish… the month of March which is historically bullish… and a Fed day which is a catalyst that tends to be bullish as well.
My gut feel here is that there are still a lot of investors that are underexposed to this market. We already know from a quantitative standpoint that the level of call selling that’s been going on is pretty unprecendeted, so we can easily see the market blow up higher to screw over all those call sellers.
I’ve been in a position VERY SIMILAR to this in 2013 and by adding the call hedge I’m being proactive so I don’t get screwed over like I was back then.
Now what will happen here is if the market does manage to rip higher is I can use the profits of the call to regain the high ground on the trade and I have a lot more options available.
March 21, 2016 at 10:36 am #5076 -
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