Quote:
Originally Posted by _______
Appreciate all responses. Completely identify with your first.
I guess my questions arise from the multi-leg nature of these transactions. I assume that you want to open and close them all at once to avoid exposure to market movement with just one leg. Can you actually use limit orders? If yes, how does that work with 2+ legs.
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A butterfly spread is the combination of a long and short vertical. It takes on this pattern:
+2
-4
+2
Which you can break down into two individual spreads. One long & one short:
+2
-2
-2
+2
You can enter the trade as a butterfly, which I think is better than "legging in." Legging in can work if you're lucky, but it can also go against you.
You can exit the trade the same way you entered by simply selling the butter. Or, you can sell one leg of the spread at a time, or you can just sell one leg, long or short, and leave the other on. I've done both.
For example, if the long vertical part of the butterfly is profitable and will likely expire out of the money you can close out the short vertical, which is most likely losing money.
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PA's comment on taking in in the shorts exiting his verticals is what made me wonder. I guess I'm assuming to exit all at once you have to place market orders. I can see why that would place you at a disadvantage.
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I think the verticals he's referring to are hedges that he added along the way. If the vertical hedges lose money the short puts in the butterfly probably made money, and vice versa. The vertical hedges help to balance the position.
His verticals lost money because the RUT went down, but had it kept going up they would have made money and helped to offset losses on the butterfly-helping to keep the position as delta neutral as possible, which in turn gives you time to profit from the time decay of your short puts.
Adding verticals as a hedge along the way are important to do in case the market spikes up or continues to trend up.
Had he not added those verticals (or IWM calls) and the market shot up the position could start to sink.
This is where understanding the Greeks comes in. The Greeks give you valuable information about your position and how you should proceed.
My last M3 profited $1500. The butterfly and all of the verticals lost money. The long IWM call hedges is where the profit came from. Other times it might be the opposite.
It's a balancing act. You are the juggler trying to maintain equilibrium.
If you want to exit all at once you can still use limit orders, you just have to be patient. You can sell the butters and then the verticals and then the long calls.
I've exited most of my trades in pieces. First I get rid of the short puts, and then the long puts and depending on which way the market is trending at the time the long calls. Or maybe the other way around. It just depends.
And on several occasions I've closed out everything but one of the vertical spreads which will most likely expire out of the money allowing me to extract maximum profit.
Mike may have a different philosophy. It's like horse racing and poker. There are different approaches that can achieve the same results.