Ricky
If you take the concept of selling off butterflies and extend this approach a little it may help to see how Michael converted his position on 18 May from a Butterfly type spread to a strangle.
1. Assume your position is a 130/140/150 Iron Fly [+1p 130 / -1p 140 / -1c 140 / +1c 150]
2. You want to sell off the butterfly, so look at trading -1p 130 / +1p / +1c / -1c
3. you realise that the 130p / 150c are either too cheap to sell or you want to retain some leverage in the wings
4. therefore you just buy the Fly Body [+1p 130 / +1 c 130]
Whereas, Michael does this kind of trade instinctively, the rest of us probably need some sort of logical framework that works from first principles; which is where position dissection comes in handy.
Cheers
James
--- In OptionClub@yahoogroups.com, Ricky Jimenez <rickyjim@...> wrote:
>
> On Sat, 22 May 2010 18:58:55 -0000, "JP"
> <jamesbparker999@...> wrote:
>
> >Ricky
> >
> >Difficult to say where you would get most benefit from Cottle's book without knowing your trading style ... maybe useful if you posted some sort of sample trades and we could start there ... like you, I don't find the concept of selling off embedded flies very practical ... but it is based on exactly the same concept when Michael says that the priority during expiry week is to buy-in risk ... and if you take Michael's last adjustment he effectively converted a fly into a strangle ... equally dissecting out the flies is done to reveal residual risk that is often non-transparent and can be dealt with quickly when the opportunity arises ... if I had to make a suggestion, from memory, I would go with the chapters on verticals and wingspreads ....
> >
> >Have a good weekend
> >James
> >
> The last GS trade, I think, was quote different than selling off baby
> flies. The former averaged out a very profitable with an unprofitable
> section of the graph between 130 and 150, resulting in a completely
> flat but profitable area with a profit between the previous large
> profit and smaller loss. Subracting off a fly usually makes a little
> dimple in the expiration graph of a larger fly while making an even
> smaller profiting effect on the entire graph. Flattening seems to be
> a more powerful technique.
>
> As for my own trading style, I have never been one for daily
> adjustments. So my interest in the GS trade has been of an
> educational nature. Mostly I do lots of small time (back)spread
> positions where the idea is to make good guesses at the beginning of
> the month and close out or rollover at the end. I am still paper
> trading reverse ICs and may even try some with real money soon.
>
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Hey, thanks for the information. your post s are informative and useful.
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