Very fine lecture about the basics of options trading, much more than just explaining a specific strategy. Every rookie should watch this! Thank you so much
Seth, I've watched a number of your very excellent videos. This, by far, is the best one I've seen. You take this very complex strategy and fully explain how to structure it and why it is so structured. I'm now in the process of testing it in my paper account and once I become comfortable with it I will apply it to my live account. In your example, you are dealing with Puts. I'm testing it with both Puts and Calls and, so far, I really like what I'm seeing. I may stop doing Iron Condors altogether thanks to this video. Thank you.
That's a profound insight that I hadn't really thought about. The side debate about what exact percentage of options expire worthless is irrelevant. The point is the options market is zero sum and more about insurance than just risk taking, therefore selling options is a way for you to capitalize on this, as opposed to trying to beat all the traders in one on one movements.
I might have had to watch this a few times but this is probably the best video I have seen on any options strategy. All I can say is thank you and I wish I had seen this one sooner
Yay Seth! Please explain: 1. What to do if it goes early into your zone. 2. What to do to close. What kind of close order maybe. 3. What to do, how to manage, if it zooms into your risk zone.
Ron, I'd manage risk by planning this trade for max loss at expiration. If the short option is OTM 15 mins to expiration, simply close (or do nothing as they'll simply cash close at expiration) the ITM long option for a massive gain and let the remaining options expire worthless. If all your options go ITM, then you'll have to accept your max loss, or the amount that your broker has set aside for you to conduct the trade. This is not a good option in high volatility markets. Therefore, if the VIX is above a certain amount, like 20 or so, I'd wouldn't really do it. My 2 cents. hope that helps.
That was a great lecture. I now understand broken wing butterfly better than I ever did before. You make options training about as riveting as it can get.
As usual, the most organized and simplified explanation of all the Butterfly videos and explanations. (Ive watched several other explanations and would come away with WHY? ) Thanks as always.
These can be good trades but when considering them I also like to compare it to a simple short put, or put spread with the same breakeven price in that expiration or longer ones. That won’t give you the big pop on a gradual down move, but it may yield a better credit, will be cheaper to put on, will often decay faster, and gives you different management opportunities if the trade goes against you. Due to the improved theta decay the simpler put play can be done at a further expiration, butterflies rarely pay until the last few weeks.
Actually right after the CBOE opened (in 1972, I believe) the market was so chaotic it was sometimes possible to put on a butterfly for a credit. Of course, that didn't last long.
Basically the complex positions arebuilt from the verticals. this is a unbalanced vertical with the safety on the bottom. I've looked at these and the condors. I like the way you talked about managing your trade. I will well puts off of puts that I own. If that sold price drops in half I will cover it and hold the long put for when and if it dips again. Its interesting and I think of it as a net I am selling puts off of over and over. It must be really hard to teach options. Every time I try to explain I always just end up saying its complicated I know. I get it. lol.
Put this trade on 52 times over the course of a year? But I see $SPX options that expire every Monday, Wednesday, and Friday. If I have the capital to handle the simultaneous trades, can’t I put it on 156 times a year? Thanks for the video!
Curious as to what the approximate likelihood of incurring the one case of losing money actually is? Would you or anyone else have some data on that? Seeing as how $9850 of loss could wipe out 65-66 trades of $150 profit, the likelihood surely should be relatively small. This obviously also ignores the big money scenario, but just I'm just curious for the sake of assessing risk.
The probability of max loss is the probability itm of the long option wing furthest from the money. This can be approximated by the delta of that option when you put the trade on. So if you buy the 20 delta put as your far wing, max loss would be about a 20% chance. Your breakeven is higher than that strike, so probability of profit is something less than 80%
just plan the trade and risk management for max loss. start with only 1 lot, opposed to 10. therefore your max risk would be $985. On a 100k account, that would be 1%. make sense? Also, I wouldn't trade in high volatility markets. Definitely wait until the VIX is as low as possible, under 20 would be the minimum criteria for me. I'd also put the trade on for 1 week and during the last hour of trade day on Friday or first thing Monday morning to expire 5 days later. my 2 cents.
@@caseytailfly Complete nonsense. Max loss of a BWB (ignoring the premium) is wing#1-wing#2; in this case, 10-20, i.e. a loss of $10 per share, or $10k for 10 lots. Also, POP is not a *predictor* of movement - just a statistical evaluation based on past performance. It tells you nothing about what's going to happen on a single trade.
@@maggiallaire6008 VIX is an eval of 30-day forward volatility; read up on it at the CBOE site. It has nothing to do with putting on a weekly fly... except that low vol in SPX means you're not going to get any meaningful credit for your 10-delta shorts and will most likely need to go out further with your lower wing (i.e., increase your risk by another $5k.) If you're *selling*, you're short vol - which means you need high vol at entry and decreasing thereafter.
Here ya go... from a Mark Wolfinger blogpost.... I may be wrongly assuming this is correct...but the logic makes more sense than saying "75% of options expire worthless"... According to historical OCC statistics for the year 2015 (for activity in customer and firm accounts), the breakdown is as follows: Position closed by selling the option: 71.3% Exercised: 7.0% Held and allowed to expire worthless: 21.7% This data from the OCC is accurate. So why do so many people believe that 90% of options expire worthlessly? Basically, it is a mistake in logical thinking. It's worth noting that open interest is measured only once each day. Let's look at a simple example: Assume that a specific option has an open interest (OI) of 100, and that 70 of those options are closed prior to expiration. That leaves an OI of 30. If 7 are exercised and 23 expire worthless, then 77% of the open interest (as of the morning of expiration day) expires worthless. Those who do not understand this subtlety claim that so much of the open interest expires worthless.
No stop loss. risk manage trade for max loss. all options will cash settle at expiration. Ideally price landing nearest your short options for max gain at expiration. make sense?
Seth, this is a very good video, especially the Q&A which really adds value. Do you trade 0DTE SPX? Would be really interested in seeing a treatment of the various strategies such as IF or IC.
Seth, thanks for this valuable free lesson, I really appreciate what SMB does by putting these videos out! Question, on the short options for this strategy, are those always doubled (2×) 1-2-1?
Expecially in this market. Lotto calls on the indexes are hitting waaaaaay too much for the .10 Delta 90% stat to be true in all conditions even if it's true historically.
Hi,I tried to set up a broken butterfly trade. Is it a buy or sell options trade?when I entered, it showed a negative price. Is it correct?appreciate any help
index options (european style) can't be exercised before expiration date so they will exercise or expire for you the morning of expiration date (your broker might charge a fee to exercise.) however you can still sell/buy the contracts back to close the trade earlier.
At the 26:15 mark you said you could technically buy the order and then "flip it a minute later". I had pondered this as well ...if you are profiting on the premium why hold to expiration. I am just not sure at what percentage of profits it would actually be?? Someone with a huge account could flip em all day 25 times a day and make money potentially??
The reason you wouldn't close early I would say might be because of you sell your protection, that 5th option, if things go south, you could end up requiring collateral/margin and also at expiration, you could end up being "gifted" (required to buy) 100-1,000 of shares that you didn't want or anticipating to buy, that you may not be able to sell right away. Part of the strategies is to end the end of the day, avoid having to purchase the underlying stock or, if you know what you're doing, close early tonight some really nice gains.
I presume the butterfly body is set at the lower expected move? I wonder what your realized return would have been if you ran this trade every week the last 3 years.
Maybe I missed it, but what deltas are you trading? For the life of me I can’t figure out how you’re getting any credit on your positions. When I do a back test of 25/15/5 deltas, it ends up as pretty meager return on capital, with a 50% win rate.
Thomas Lee I’ve modeled that exact strategy. Tues/Thurs 1 DTE’s are the most consistent. I used delta 25/15/5’s with a 30% SL. The results were 50% win rate, 30% ROC. If I move strikes up to 45/35/5 with 30% SL, the results shift. Win rate goes up to 70% and ROC is 125%. This is a 1 year back test. Longer time frames show similar win but lower ROC.
@@mattportnoyTLV I've seen your responses on some other SMB posts. Thanks for back-testing these strategies, man. Good work. Quick question: did you check time of day variables? In other words, does morning vs. afternoon Tuesday/Thursday make a difference?
Hal 9000 Thanks. unfortunately I , due to the limitations of my back test software I can only do EOD based tests. I’ve tried several varieties and they have the same limitation. I’m sure the big $$$ platforms have more features.
I am having trouble finding an actual example of this. That is, a broken wing butterfly on an index that would be a credit. Also it seems like even with 1 2 and 1 lots, this is a large amount of margin.
Not all of these complex option strategies will work for every stock. Many of these complex strategies are intended for a specific stocks or stock set are likely to move in different directions. At the end of the day mostly strategies can work on all stocks you just have to plan your strike prices accordingly based upon volatility and historical information.
What blows my mind, is the assumption that traders are holding long options to expiration. And that's the baseline assumption being used to promote strategies that sell premium. If guy wasn't a pro I'd assume he didn't know what he's doing. Long options go through multiple uses during their life cycle, during Which they are used to trade a timeframe and passed into the next Market timeframe. From LEAPs > multi month swings > momentum trades > intra weekly > day scalps > expiration lotto. The only one you MIGHT hold to expiration is a same day lotto.
You make this waaay more confusing than you should be. I really wish you would just state what the Credit (Or Debit) per contract is and how many contracts you are selling/Buying for each strike and how many days to expiration so those of us who trade Options regularly can decipher what it is that you are doing. All this drawn out explanation is actually very frustrating and hard to watch.
Dennis of course that can and does happen with each strategy but that loss must be absorbed within the strategy expectancy or it is not a valid strategy long term.