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On Sep 14, 4:33pm, James Charles wrote:
> I like your post and I agree with you. In fact, I was just talking to a
> market maker at the Phil Exch and he has already sold iron butterflies
> just like you propose to do. Whenever I have tried that though I had
> problems relating to the following.
uh oh, now I'm worried. Somebody else is doing the same thing. :) I know
what a "butterfly" is but haven't heard the term "iron butterfly". I think
the position of selling both the credit spreads out of the money, however,
makes this position technically not a butterfly, because I usually think
of a butterfly as having the "middle strike" at the money. I think
a true butterfly position has a lot less risk, and usually a pretty
small gain, is tricky to establish, but if you can do it for a
credit you have locked in gain.
>
> 1. Early excercise happens. It scares me and I don't know how to
> manage it. And as a retail customer I don't get prompt notice of fills.
> I know enough to monitor the market but rolling up the spread involves a
> lot of slippage. WHEN do you do it?
I'd watch the intraday action, and if there's any possibility the short
strike will get hit, I'll look at rolling the entire position up/down
and out a month, and enter that trade before the close. I've had
the situation before of being exercised on the short strike a full
10 biz days before expiration, and then due to broker error (so much
for full service brokers), not hearing for two days later that the
option was exercised (via a confirm notice no less), in spite of explicit
instructions to let me know as soon as possible. Fortunately the market
hadn't moved much, I still lost money, but not as much as I might've.
So, yes, it is scary, and the only defense that I'd offer is to consider
the SPX options instead (they're Euro), or watch 'em like a hawk, and
to be willing to close/roll intraday for a small loss if you have to.
>
> 2. I must buy the more out of the money options before I sell the less
> out of the money options. If I put the order in as a spread for a net
> credit, I get screwed because I pay the ask and I get the bid or I don't
> get executed. How do you handle order placement?
Usually, I'll wait until the market is losing momentum on the current
move, and options prices are fairly stable, and then enter a buy of
both the long calls and puts at the market. Once the straddle is
in place, I look to fade the next move and sell the option against
that move. Then, I wait/hope for move in my favor, and place the
option sell on the other side. If things aren't going my way, after
I've waited a while, I'll just put in a market order, and take the
loss. So to summarize, I'll buy the straddle at the market and try
to leg into the short strikes. Usually, I have a price objective
for the total credit I'm after, so that helps. I try to get it all
done in about a half an hour.
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| Gary Funck, Intrepid Technology, gary@xxxxxxxxxxxx, (650) 964-8135
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