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Raleigh Durham Open Stocks Futures FX Options Traders Meetup Message Board Trading Discussions › Butterfly against Wrangle Limited-Risk Calendar Spreads

Butterfly against Wrangle Limited-Risk Calendar Spreads

Don B.
Group Organizer
Raleigh, NC
Post #: 1,018
This is a more specialized continuation from­

in which Arthur posted:

Hi there! I actually corresponded with Allan Jan Baird and he elaborated to me on the strategy which he used very successfully as a options market maker, retiring with a fortune. It may not be easy for off the floor traders. The idea is to look for an underlying which has a propensity toward volatility spikes or price spikes. Put on a ATM butterfly in the front month (long wings, short body). In the next month out, buy a wrangle (a call ratio back spread and put ratio backspread. This wrangle is short the body, long wings (sound familiar?) and long an extra set of wings. The number of contracts of fly and wrangle have to be carefully balanced so the profit on the fly, if the spot does not move, will match the one month time decay on the wrangle, approximately. How does this make money? If the spot does not move much, the profit on the fly balances the loss on the wrangle and the position is rolled forward to the next month (which is easy to do since you only have to take off then extra set of wings in the back month; and open a new wrangle i the following month.) But -- if there's an explosion in volatility or price in the front month, the position loses a little on the fly but makes a fortune due to the extra wings in the back month. For off the floor traders, the commissions to put on and adjust this position are prohibitive. So I actually use something similar but with fewer strikes and thus fewer commissions. An intriguing play coming up right now is PCLN which has a history of making large moves around earnings which are scheduled to be reported in early November.

Don B.
Group Organizer
Raleigh, NC
Post #: 1,019
Let's plan on exploring these in depth in a future meeting (which may not be right away because of scheduling issues). I am going to try some of these wrangle-against-butterfly calendar spreads.

Meanwhile, Arthur, if you do have time to post a summary of your PCLN idea, I am sure that people would be very interested.

By the way, I found Baird's book the best book I have ever read on options trading. Even though the book is aimed at Market Makers, he does a complete comparative study of all option strategies along the way, and, perhaps surprisingly, concludes that only a few are suitable. The book was quite exciting to me.
A former member
Post #: 1
Interesting post/topic. I am about 80% options traders (vs. stock). I mainly use options for directional trades but am expanding my approach and adding calendar spreads. I would definitely be interested in this for a future meetup.
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