BWB - some basic questions

[M12]

Hello,

I just did some initial tests with Broken Wing Butterlies in ONE, because I want to learn more about BWB. Here are some butterfly beginner questions:
1. How far does it matter if it's setup with Puts or Calls?
2. A fast search with google shows only bearish BWB. Do bullish BWB make no sense?

 

[srk]

Hello,

I just did some initial tests with Broken Wing Butterlies in ONE, because I want to learn more about BWB. Here are some butterfly beginner questions:
1. How far does it matter if it's setup with Puts or Calls?
2. A fast search with google shows only bearish BWB. Do bullish BWB make no sense?

1. How far does it matter if it's setup with Puts or Calls?-- there is put-call parity, meaning if the butterflies are constructed with mirroring calls/puts (meaning a put with delta 45 is equal to a call with delta 55), in general, it is called a synthetically similar position and will be expected to behave reasonably similar to each other. some issues to consider-- in general it is easier to trade out of the money options (OTM) than in the money (ITM) due to liquidity issues


2. A fast search with google shows only bearish BWB. Do bullish BWB make no sense?-- depends on your market outlook, you can do bullish or bearish.

 

[M12]

1. How far does it matter if it's setup with Puts or Calls?-- there is put-call parity, meaning if the butterflies are constructed with mirroring calls/puts (meaning a put with delta 45 is equal to a call with delta 55), in general, it is called a synthetically similar position and will be expected to behave reasonably similar to each other. some issues to consider-- in general it is easier to trade out of the money options (OTM) than in the money (ITM) due to liquidity issues


2. A fast search with google shows only bearish BWB. Do bullish BWB make no sense?-- depends on your market outlook, you can do bullish or bearish.

Ok, thank you! Especially the better liquidity for OTM options is a good point. That would mean to setup the bearish BWB with puts, if I understand that correct.

Another observation:
In my test the setup with calls resulted in a credit whereas the setup with puts resulted in a debit. But I did not test with mirroring call/put delta. I did the test with equal strikes. Guess a setup with a debit has advantages, too.

 

[srk]

end of the day, the margin should be the same for either setup ( call or put butterfly) if it is a butterfly placed similarly.

I place mine as an iron fly always instead of as a butterfly, because i trade with fidelity with portfolio margin, and it works out much better on my margin as an iron fly, since they deduct both the credit spreads from the margin for the trade. But for other companies, from what i can see from the forums, the margin is the same whether you do iron fly or butterfly (which again synthetically are similar).

Plus one of the market gurus i follow, feels with ONE, the volatility skewing is better represented in the iron fly than the butterfly. On my amateurish testing, I dont know that this is actually true.

 

[Marcas]

M12, you get good answers from srk. I add few things/advises from my end.

Be careful with forming your opinion solely on ONE results. If you do, you may be deceiving yourself. Not that ONE is trying to deceive you but by very nature of how it's design or rather data it uses - not bad but can lead to serious problems in the future.
Do use ONE if you like, it but try to understand the tool you are you working with and how it relates to to reality. One way around that is to conduct a lot, I mean a lot, of tests to get realistic pic, especially if working with less liq products. Very time consuming task with ONE. The other, less popular method, I suppose, is to focus on understanding of a nature of BWBs and confirm, or refute, your findings with ONE or life chains (better).

Googling for sources is also a good approach but, again, you have to make correction for results you are presented with. Typically each BWB guru pitches his product, aka some specific BWB, usually with a name attached. Do listen to gurus but do think of arguments they are using. Some of them are good and sound but some are... not. Do not take every advice blindly just because 'guru said so'. It is better to understand and master just few rules governing BWBs then have a long list of 'magic setups and signals'. Again: starting form understanding nature of BWBs and not from some specific type of BWB will set you better off in a long run. Imo.

Don't take my advice blindly. Think of it.
Good luck.

> A fast search with google shows only bearish BWB. Do bullish BWB make no sense?
Saying truth I'm surprised with those results. ( Can mean I'm wrong on other stuff too. ) I thought bullish BWBs are more popular in retail trader's world (due to psychological reasons mostly, sometimes bullish BWB do make a lot of sense).

 

[M12]

@Marcas Do you have some more concrete information about ONE, it's data and how it relates to reality?

I guess with a lot of tests you mean backtests, especially the automated ones. I really like them and use them from time to time for ideas or when the market changes.

I know there are several more or less famous butterfly rulesets out there. From Locke, Bertino, Aeromir.. . They sound interesting and helpful. Do you have some more concrete advices how to understand the nature of BWBs, without buying some of them? Books about butterflies are hard to find. I know only one. But there are a lot of videos out there. Don't know how useful it would be to watch more of them.

 

[Marcas]

What I said does not related to ONE in particular. All market data 'consumers' are experiencing this issue. In short: the problem is that market data are usually snapshots with all market fluctuations and inaccuracies captured - a natural thing if you think about how market works. This is the reason you see unreal prices or twisted t+0 lines. Is this a serious issue? - depends on what you are trying to accomplish. You can smooth out data to get rid of those 'inaccuracies' but that produces new set of issues. People sometimes long for perfect data - which is simply unrealistic dream. It is not that bad though. If you understand what is going on you can compensate somehow with no problem. Problems do arise if you read data literally.

Yes, by 'tests' I mean back-testing.To my knowledge ONE is capable only of those. I'm very skeptical about gaining knowledge about any trade with BT (backtest) results only. This is not impossible of course, can be done but there ate better and simpler ways. Did write about it couple times and don't want to go there again. Same principle: do understand what BT is and what it is not.

About resources. I don't want to mention names. Usually it gets personal and the merit fades away. I can not give you advice to buy or not to buy any of those courses. Much depends on what you already know, what is your style, what you want to achieve and so on. In general I'd recommend not to buy any courses as a first thing. The reason is that courses I know will drag you into path of 'rule based trading'. By that I mean that you will be told to follow rules without truly understanding what you are doing. Some rules will be good, some ridiculous and you may have no way to discern which is which. Same with explanations of the rules (if such are provided) they can be good or can steer you on the path for a long wasteful journey.

Unfortunately I'm not aware of any source for new traders I can recommend. My advice, for some time now, is: do your own research. I understand it can be a challenge both for newcomers and mid-level traders, especially if done alone. A a suggestion (and shameless self promotion - but not really): a while ago I shared here on Aeromir a web -tool, that is part of it, that I've created for myself to get' feeling' of different options structures or, to say other way, to get to grasp 'the nature' of options structures. It is free but it get no traction at all. I guess... whatever. It still might be on Heroku - but not for long - heroku is closing down all free accounts.

As always: all I said are mostly my biased opinions. I can provide reasoning behind what I said, but it does not mean I'm correct on everything (or anything in that matter). Unless somebody proof me, wrong I stick to my guns.

 

[tom]

1. How far does it matter if it's setup with Puts or Calls?-- there is put-call parity, meaning if the butterflies are constructed with mirroring calls/puts (meaning a put with delta 45 is equal to a call with delta 55), in general, it is called a synthetically similar position and will be expected to behave reasonably similar to each other. some issues to consider-- in general it is easier to trade out of the money options (OTM) than in the money (ITM) due to liquidity issues

Call and Put butterflies are synthetically identical; however, if you are trading something that isn't settled to cash you can have assignment risk.

BTW: I've seen people talk about pattern day trader restrictions and that you can't open and close 0DTE butterflies the same day if you have PDT restrictions. If you are trading a cash settled instrument you can open a call or put only butterfly and close it synthetically with the opposite fly (ie...opened a call fly and close with a put fly with the same strikes and contracts).

 

[Cary]

Hello,

I just did some initial tests with Broken Wing Butterlies in ONE, because I want to learn more about BWB. Here are some butterfly beginner questions:
1. How far does it matter if it's setup with Puts or Calls?
2. A fast search with google shows only bearish BWB. Do bullish BWB make no sense?

Hi, I think all of the above is good advice, but I would add that you can learn quite a lot by viewing John Locke's free presentations via YouTube. Whether or not you pay for his courses or any others is another decision which may or may not be worth it to you. I use ONE and don't have any issues with it. I find it to be as accurate as possible given that option models have to make certain assumptions and use the market data sources available as inputs. Nothing is perfect, but it is a very good platform which I would not trade without ( and it is reasonably priced).