I am writing this post as a record of a conversation I had with a veteran ex-floor trader.
Apologies for the messy notes but the conversation drifted across many topics and I had one hour to get as much out of it as I could.
First subject was how to repair a trade that is going against you.
- If the price of whole BWB spread gets beyond your comfort zone, then it might be time to get out of the trade
- Put a dollar limit (e.g. $2) to buy the spread back as a stop loss
- 1:5:4 Difficult roll it out
- Don't push it out to the next month - what if it goes against you?
Adjustments I have at my disposal
b) change to a regular butterfly 1:2:1 505:515:525
c) Open new position 520/525/535 push the loss point at expiration further OTM but adds more risk (margin held)
d) change to 1:3:2 close 2 x 515/530
Refinements to the BWB entry rules
- Position long strike at expected move or at 5% OTM whichever is greater
- OEX moves 4-5% on average per month for the past 10 years
9% is the normally the garbage tail for the BWB
- 1:3:2 weekly trades! 1 week to go ONLY (is this OEX Weeklys?)
- 1:2:1 monthly are for the monthly trades!
- 4 weeks in advance
Long term technical analysis market outlook is required (random walk) not specific technical analysis
Measure of safety - take the expected move as the long strike if the EM is more than the 5% OTM strike
Typical returns of this floor trader is 5-10% return on margin held per month
- Conservative - long strike is at 5% or EM
- Aggressive - short strike is at the 5% or EM
Select Max width between long and short strikes for zero net debit or slight credit
Some people choose to shorten the widths between the strikes for larger credit
Widths between the strikes are impacted by the VIX (high volatility, wider between strikes)
This post first appeared on A Boring Way To Make Consistent Profit From Tradin, please read the originial post: here