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Net Zero Broken Wing Butterfly
Presented by Mark Mosley A direction-neutral approach inspired by the methods of Andrew Falde and John Locke 1
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Delta-neutral butterfly
Rules for Net Zero Delta-neutral butterfly 1. Enter trade days to expiration 2. Select strikes having the deltas closest to 60, 40, and 20 delta 3. Exit trade if any of the following criteria are met: Exit trade when middle 40 delta strike changes by 30% Exit trade when upper 60 delta strike changes by 30% Exit trade at 30 days to expiration regardless Delta value to monitor 20% change (caution) 30% change (exit for sure) .40 ( short center leg) .32 to .48 .3 to .5 .60 (long upper leg) .48 to .72 .4 to .8 2
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Typical Delta-Neutral entry: hedges our bet in either direction
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to Falde’s basic rules…
My modification to Falde’s basic rules… Exit trade when Delta/ Theta ratio exceeds 50-60% Exit trade when Delta/ Theta ratio exceeds 50-60% This trade is designed to be placed without regard to market direction. Most of the time, we have no idea which way the market is going. By taking a delta-neutral stance at the beginning of the trade, we hedge our bets either way 5
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Why Delta/ Theta? Delta is a measure of directional risk
Theta is a measure of time decay We always want to be collecting Positive theta $ Delta/ Theta is a measure of the directional risk we are taking, compared to the $ we are being paid to take that risk (positive Theta) The closer we are to 0, the more tolerant we are of large directional price moves In practice, a certain amount of positive or negative Delta is acceptable as long as it is small; we measure this with the Delta/Theta Ratio If our Delta/Theta Ratio exceeds %, we should probably take profits and exit the trade
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...and a couple of honorable mentions
Gamma- rate of change of Delta a risk factor that we manage by entering the trade 55 to 80 days to expiration, and exiting the trade somewhere between 30 to 20 days to expiration Vega- sensitivity to changes in volatility a risk factor reflecting the sensitivity to changes in implied volatility. In practice, we may run fairly high Vega numbers. This is not usually a problem as long as we are positive Theta
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Typical Delta-Neutral entry: hedges our bet in either direction
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If you are more Bullish, you may consider a butterfly consisting of the strikes 20,40,~56 which would show positive Delta at the beginning of the trade. 9
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Simple monitoring of trade from Monitor tab– Similar to TOS smartphone app
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A A quick glance at your mobile device running Think or Swim mobile can tell you if your Delta/ Theta ratio is OK… In this case Delta of 21 divided by Theta of 144 equals= 14.5% so trade should be OK
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Case Study Let's walk through an actual trade: 6 lot trade (6x12x6)
placed on December 20, 2016 February expiration cycle, 58 days to expiration consumes $21,900 worth of buying power I will walk through a actual trade that I entered of a 6 lot trade (6x12x6) placed on December 20th 2016… placed on the February expiration cycle, 58 days to expiration. This trade consumes $21,900 worth of buying power. 13
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58 days until February 17, 2017 expiration
Case Study- Neutral entry of a Butterfly entered December 20, 2016 58 days until February 17, 2017 expiration 14
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How to make a million bucks in 2 years…by compounding
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Thank you , and good luck in your trading.
Where to find out more: (free short trial) Falde’s systems workshop. ($1 short trial) Paid Seminar in NYC in May on Net Zero- This presentation brought to you by Mark Mosley If you enjoyed the presentation and would like to make a donation to the author of this material, my paypal account is under Thank you , and good luck in your trading.
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