--- In OptionClub@yahoogro
>
>
>
> -----Original Message-----
> Ricky Jimenez wrote:
>
> >
> I think you are saying that an arbitrary position in calls, puts and
> the underlying is equivalent to another one with only calls +
> underlying or puts + underlying. Yes, but I don't see why it is
> necessarily simpler to analyze without the expiration graph than one
> with both calls and puts.
>
> MC -It's not necessarily "simpler." It is a way to manage and analyze a
> position without a graph. You can instantly see what strikes you have or
> lack inventory at and you can quickly estimate delta exposure for hedging
> purposes.
>
> >
> Just what is the most general statement that can be made about
> decomposing an arbitrary options position into flies? I knew that
> condors can be broken up that way.
>
> MC - not sure what you are looking for. When you trade a large and
> dynamically changing position (such as a market maker would) you are
> constantly looking to hedge away risk to lock in the edge you receive from
> the bid/ask spread differential. A butterfly is a risk free trade, so it is
> one of the natural positions a market maker - and by extension, any trader -
> might look for to lock into (the others being boxes and
> reversal/conversion
> expiration cycle, if you can continually lock in risk free, positive edge
> trades like flies, you will be a consistent winner. So, to me, decomposing
> into flies is really an analytic technique designed to highlight what gaps a
> position has that need to be filled in order to accumulate risk free
> profits. No matter what your trading style, if you can at least be aware of
> how you can turn a position into a guaranteed winner, it will help you
> understand how to be a consistently successful trader. Can you do it with
> graphs? Yes, but the obvious trades are not always apparent in a graph. The
> risk is there but the solution for resolving or eliminating the risk may
> become a function of trial and error for someone that hasn't had to do the
> fly-conversion-
>
>
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I would not say; "A butterfly is a RISK FREE trade, so it is
one of the natural positions a market maker ..." Certainly the risk is limited and relatively smaller than most position types and I realize the point trying to be made but I would say that because butterflies do not fluctuate in value for most of their life, removing them via dissection often uncovers more potentialy iminent risk to deal with first. I would also say that there is a synergy to evaluating risk using dissection along with traditional analysers.
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