risk reversals -> butterflies

J

Jason

Guest
One of the presenters this week, talked about starting with risk reversals.

He started with a bullish risk reversal. He bought a bull call spread or just a call, then sold
a put credit spread to pay for the call (spread).

If the underlying went up, then great, cash out the profitable trade.

Then he did an interesting thing if the trade didn't go his way.

If the underlying went down, he turned the short put spread into a butterfly.

He also turned the long call spread into a butterfly.

This gave him "tow towers"/two condors/two butterflies (possibly broken wing) at
1sd or less from the original at-the-money location. This was fairly delta
neutral, but of course can be adjusted to have small deltas bias as one likes.

Then he talked about doing another butterfly/bwb between the two towers.

If anyone else saw the talk, did I accurately capture the trade in the description
above? Was there more to it?
 
Scott's trade is based on layering the other verticals in as the market moves with you. So in the case above. he started with a short put spread, long call spread and as the market moved up he did the opposite bought a put spread in front of the short one and sold a call spread above the long one. The graphs shown are based on favorable market movement. In previous material I have seen, if the market moves against the trade he would typically close/layer another one or actually sell a vertical and turn one of the sides in to a short butterfly (bullish risk reversal and price goes down sell a call vertical in front of the long one turning the topside in to a short butterfly).
 
GH13 said:
Scott's trade is based on layering the other verticals in as the market moves with you. So in the case above. he started with a short put spread, long call spread and as the market moved up he did the opposite bought a put spread in front of the short one and sold a call spread above the long one. The graphs shown are based on favorable market movement. In previous material I have seen, if the market moves against the trade he would typically close/layer another one or actually sell a vertical and turn one of the sides in to a short butterfly (bullish risk reversal and price goes down sell a call vertical in front of the long one turning the topside in to a short butterfly).
Click to expand...

Do you know if the scenario where the mkt moves against the position once put on is described n his book or is there a presentation somewhere. Most of what I've seen tend to be where the mkt moves are favourable to the position or where their will be another position in another shorter expiry used to absorb the adverse mkt move.
 
vega4mike said:
Do you know if the scenario where the mkt moves against the position once put on is described n his book or is there a presentation somewhere. Most of what I've seen tend to be where the mkt moves are favourable to the position or where their will be another position in another shorter expiry used to absorb the adverse mkt move.
Click to expand...
I don't own the book but from all of the info online I have seen his adjustments are really based on market movement in the right direction. It doesn't take much movement but if the market goes against you immediately you will have to close, layer in, or reposition. I look at this trade as a directional one and using verticals to essentially leg in to the position.
 
I watched the presentation
Looks interesting but it's probably not something that I would be able to do since I don't have free time to watch the markets or wait for an alert. As he said in the video you have to have a directional bias and have to know where the resistance levels are which I don't otherwise I would probably trade stocks I like the simple income trades more

This style of scaling in or layering reminds me of the video of Ed Tulauskas from Random Walk Trading that was on CD a couple of years ago which is not much of a surprise since he was at Random walk for a while It's just interesting the parallels between the two companies and how they went in separate ways but the trading style is very similar

As far as the margin this would probably only work on TOS and maybe a few others but most brokerages would not reduce the margin because of a debit spread but with 5 wide spreads the losses are relatively small
It's not clear how much the typical gain would be I guess it depends on your trading skill and how fast you can layer at the right time
Not sure how he got to $600 margin as the smallest spread is $5 wide so that would be $500 I am guessing maybe the margin was 1k and than subtracted $400 that he gained at that point
 
This would be a tough trade to do it the way he presented if you aren't watching the market. You can enter limit trades, I have actually been filled on risk reversal limit orders in TOS. The other consideration is a longer DTE. In equities, I will often get long by buying a call and selling a wide put vertical instead of buying an ITM call option. There are a thousand ways to do it. One of the things about this trade that is interesting is to use it in conjunction with a RTT type trade (Tom has an example in last weeks TG I believe). You can put a bullish one on such that the call spread will kick in if we continue up, and the trade hurts you below the market where the RTT will cover the losses from the put credit spread piece. If the market sits you lose nothing on this (depending on the setup).
 
GH13 said:
I have actually been filled on risk reversal limit orders in TOS
Click to expand...

That's good if you can get filled on a custom 4 legged order I am not sure how easy that would be on a fast moving market or something that is further OTM
Also there are some brokerages that don't except ratio spreads so I would have to leg in 2 by 2 and try to do it in a calm part of the day
It would have been interesting if he would shown a trade that went against him and how he would try to defend it or flip it
I understand that there are a lot of variables that go into this type of strategy so it's probably not easy to set up any kind of rules that can be followed it's more like select the one that works in your favor in the same direction as the market and hopefully you can get a little profit to lock in any gains before you enter the risk reduction trade
It seems that there is a lot of subjectivity with this type of trade
 
Interesting. I had not considered the short butterfly before. Seems like the deep spike down would make for lots of margin and thus hard to get return-on-margin to work out well.

> In previous material I have seen, if the market moves against the trade he would typically close/layer another one or actually sell a vertical and turn one of the sides in to a short butterfly (bullish risk reversal and price goes down sell a call vertical in front of the long one turning the topside in to a short butterfly).

Is any of the previous material available online?
 
With the market up today, he would take some of the cds off and reduce the risk and do something like this. I put on a pds in this one too. I could have very well sold a CCS instead of taking the CDS to create a condor on the upper range.
1534171360003.png
 
So he just keeps scalping it this way and reducing the risk. I need to test out the expiration he uses and the delta the positions used. He wasn't clear about the expiration. But the CCS would need to be not that close to expiration, I presume.
 
I signed up for the 1 month free trial just to see what it looks like and as I suspected it's not something that would work for me
First of all it's hard to follow because he trades in more than one underlying and even in SPX he had 3 trades in one day for 3 different expirations and one of them for one day before expiration You have to be pretty much a day trader and be on standby for execution the second you receive the alert and even so you are not going to get the same fills as he does in a fast moving market

I am sure he is good at what he does but as far as learning how to do it yourself would be pretty much impossible just by looking at his trades You have to be pretty much like a market maker like he was to have a sense of how far the market will move when and in what direction
 
You are right. I watched what he was doing and realize that it needs to be fast on the intraday. He does take a stance as to leaning long. One needs to watch the charts and take a stand. Don't know if I have time for the free trial.
 
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