The $SPX Broken Wing Butterfly Weekly Options Strategy: Q&A
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- čas přidán 16. 07. 2019
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In this video, Seth Freudberg, Head Trader of SMB Capital's Options Trading Desk, meets with a group of traders in SMB's Offices in Manhattan to review teach the $SPX Broken Wing Butterfly Weekly Options Strategy in an interactive session including questions and answers and important clarifications of this powerful weekly strategy that can be employed
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This dude is a great teacher and his knowledge is immense. It's like sniper school for traders.
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
I just want to thank you guys. Coming from forex and cfds options is a huge hurdle and your channel has been by far the most helpful.
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.
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.
Time and place for everything
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
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.
Put on my first BWB this week & truly my newest fav SPX trading strategy! Thank you Seth, and SMB Capital team
How’s it going
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.
awesome! Seth usually explains things pretty well!
this does not even scratch the surface of a broken butterfly
Amazing video. Excellent delivery to explain the material. Thanks 👍👍
Thanks Emeka. Please let us know what other topics you'd like us to cover.
The fire insurance analogy is hilarious. “Is your house currently on fire?” Hahaha 😂
Nah, just the living room! lol
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.
@@maggiallaire6008 Each of those flies has a max loss of $1500/lot, or $15,000 for 10. Letting it go to max loss is just plain stupid.
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.
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.
exactly you really have to set it up perfectly unless you are running a 30-45dte butterfly as a income strategy with a 8-15% PT
I was waiting for the answer to why we're buying the 1670 put, thanks for addressing that. Overall it's a very interesting strategy!
Leaving a space 1680 put to move in adverse scenario
Great content. What do you consider an appropriate stop loss level for your BWB traders? 7-10% of planned capital?
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.
this is awesome. I'm gonna back test this
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.
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!
Is there a follow up video talking about stops for this scenario?
Great lesson! Very well explained.
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
Great info thanks
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.
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?
They typically talk about selling the .10 deltas but I cannot see how they get the kind of credit they advertise....
Yes, butterflies are always a 1x2x1 setup
The long has to equal the amount of shorts. Each one provides the other protection
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.
be great to see what happens if price drops below the short strikes.
Just curious. Would this work as a weekly option 7 DTE?
Do you have a weekly strategy that works well in a down market?
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.
Thank you.
Is there a broker that you could recommend?
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.
Matt Portnoy are you trading in high IV
Where do you find which option has what Delta
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.
I've adjusted the legs that are similar distances apart, but I keep betting a Debit instead of Credit, am I doing something wrong?
Maybe you're selling and buying the wrong ones
For your happy example of the $8200 gain, would you have to exercise the put, or will that be automatically credited to you on expiry?
18:24. Keyword is “expires.” And its $8350.
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.
@@codesymphony cash settled. No exercising.
21:30 Noobs need to hear this and be prep to deal with all scenarious
What would be an appropriate stop loss for this trade? It seems like if you set a stop-loss you lose the opportunity for the big win
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?
What is the risk on this trade?
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.
Waw great 👍🏼
thx!
What are the deltas you target at the time of executing the trade?
How do you find what the Deltas are and why use that as a means to pick which strike price
Does this work if you aren't able to use indexes (brokerage:Robinhood)? Can you do this on QQQ?
You risk assignment. Index options are cash settled so there is no risk of actually having to buy underlying. I would change brokers.
When he says "nobody would ever make that trade"...they would; it's a ratio put spread....
Seth,
The SPY has options expiring on Mon, Wed, and Fri. Have you tried using the Broken Wing Butterfly strategy with these shorter term options?
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.
@@mattportnoyTLV okay wait a minute.. where does it have on the chain what the delta is, we just talking about on the Greeks? What's sl?
@@traderjoe5814 I didn't specify a strategy lol
wlii try this....1 contract...😀
Start small!
you are great
Can this be applied to a 10k account?
not on spx... Low price stocks, micro futures lime mes maybe. Consider potential exercise of x2 200 shares short for the margin for stocks.
hmmm, i wouldn't recommend it. you should plan each trade for max loss and even with 1 lot = $985 max loss, that would be 10% of your account.
This would have been far more useful if Seth shown a "risk graph" of that 1700/1690/1670 put BWB trade.
Only thing I’m concerned about is the risk/reward , over time if you get hit how’s the recovery
Is he taking options on futures? 🤔
Dispatch Express SPX. S&P futures are symbol /ES.
Not in this instance. He’s using $SPX. The do have strategies that employ options on futures ...
But for one lot u get 15 dollars credit...before commissions
The concept is really good but what I don't understand is you can only do this if you own the stock?
This is why he does this on index’s. There’s no stock to own
Zen to me
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.
The commissions on this trade will significantly reduce your profits, especially if you close it out prior to expiry.
I do like this strategy but it scares me because if you hold it close to expiration you risk an overnight gap that blows past your short options.
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.
when it happens, i want you to see, what happens, when it happens...😁
But you are still a very smart tribesmen
Please track the P&L for me as the price drops thru 1690 and then thru 1670
Please wash my car and bring me a cheeseburger.
Risk reward is very poor
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.
These kids didn’t do their homework
Be better and easier if you had visuals- I can't remember your bloody strikes
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.
Not such thing as guaranteed...
A market gap down that blows through the butterfly and you are toast
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.