Wings needed Wide these days ?

Jason 2

New member
Hi all,

Looking at some Hedged flys / M3s; new to this style but very interested. Traded some options, here and there, but was mainly a futures guy. Could use some help getting a couple of things right.

Checked out the typical:
10 RUT BF X 1 DITM C
10 SPX BF X 1 DITM C
[And the smaller -> 1 RUT BF X 1 IWM DITM C or also the 1 SPX BF X 1 SPY DITM C ]

The typical 50 pts wide with the guts 20-30 pts out of the money does not generate anywhere near -80 deltas to hedge with the +80 delta call; I got some weird payoffs until I widened to about 120 points or more on the wings.

Enclosed a picture so you can see what I mean.

Questions:
1) What am I missing about the wing span, impossible to do the 50 point version these days ?
2) When trading these is it typical to overhedge a little with -80 delta on the fly against +90 on the deep in the money call ?
3) Was thinking of testing the waters with a small 1 RUT BF X 1 IWM Call, should I be concerned about early assignment on the DITM call on IWM ?
4) Anyone tried using static delta, hedging with IWM ETF outright, RUT Ice Futures etc... instead of the Variable delta DITM call, any pros/cons to a static delta?
5) Lastly what services have you signed up for, or thought to be useful in shortening the learning curve on these types of trades?


Help much appreciated, thanks.

RUT_NOT_RIGHT.JPG
 

status1

Active member
I don't know much about the M3 but the graph doesn't look right to me

I mean what happens if the market goes down ? Looks like big losses from ATM down
I think that is supposed to be delta neutral at the start if I am not mistaken
I found a youtube video where he explains the current vol situation
Basically you have to increase the number of contracts to get up to 80 delta to use an 80 delta call or alternatively use an apropriate delta for the BF you have so that means an OTM call but either way you have to start with a delta neutral trade
 

Tim

Member
Staff member
I don't know much about the M3 but the graph doesn't look right to me

I mean what happens if the market goes down ? Looks like big losses from ATM down
I think that is supposed to be delta neutral at the start if I am not mistaken
I found a youtube video where he explains the current vol situation
Basically you have to increase the number of contracts to get up to 80 delta to use an 80 delta call or alternatively use an apropriate delta for the BF you have so that means an OTM call but either way you have to start with a delta neutral trade
I agree with Status1 reply. You have much too much positive delta (+66). The graph should not be tilted like it is.

You have to adjust the lot size, wing width or both but in a traditional M3 the position delta on open is pretty close to zero. In a high volatility environment this will happen (also the margin used for a 50 wide 10 lot will be lower than in a low vol environment). One "trick" would be to buy about 8x 80 delta IWM calls which will equal about 64 delta in RUT. You could use portfolio beta weighted feature in TOS to manage the delta based on RUT in the combined position.

Since you would have long calls, early "assignment" on IWM should not be a problem. You have the ability to decide if you exercise or not any time before expiration. At expiration, ITM calls will automatically be exercised in most circumstances.

Regarding question #5, I traded M3 for many years but never had a service for it. Just learned from talking with others like you are doing here, I traded roadtrip for several years and over two hundred trades, then I ran the roadtrip service until earlier this year when we closed it down. I no longer trade M3, and roadtrips are on hold while volatility is high (vix > 20) although I am paper trading them now for fun.
 

Tim

Member
Staff member
Sorry I meant about two IWM 80 delta calls (about 16 positive RUT delta), to offset the BF's -14 delta. Another criteria sometimes used for the long call is, buy no more than $1.00 extrinsic value since that is what wastes away to zero by expiration. And sometimes we would buy less DTE long calls, for cheaper, and then roll them out repeatedly a week or two during the trade. It can result in even lower cost.
 
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