Is there any way to do butterfly spreads with Nadex?
Butterfly Spreads
darrell
#2
Yes this is possible using Nadex spreads. I will post a reply sometime on Tuesday so i can give you a true equivalent test (using real live prices) comparing live prices on say ES butterfly’s and US500 Spreads. I will provide how this is done, max risk, max reward, break even live points benefits and strengths. I will also look to see if there is an advantage using binaries for such a strategy as well.
darrell
#4
WARNING: This is a more advanced option strategy. Feel free to read it but if you are totally confused don’t worry. Either ask question or move on there are a lot of different ways to trade binaries. Those who have option trading experience (normal vanilla calls and puts doing butterflies will best understand this).
NOTE: Through exploring this we did come up with a pretty cool premium collection strategy - read below.
Is there any way to do butterfly spreads with Nadex?
There are six ways to do butterflies with normal options (I cover them below and their equivalent in nadex)
Credit: (Long Butterly) (Used during low volatility) Buy OTM Call Sell ATM Call Sell ATM PUT Buy OTM Put aka short call vertical and short put vertical This is essentially selling what I call a straddle on the spreads - - but selling instead of buying both - by selling the one above the market and buying the one below the market you expect the market to stay in the range of the two movements to break even distance combined. The longer to expiration the more premium and the more risk you have as strikes are wider. If it rises you close one side out at premium collected on the other side. But if it then falls you could lose on both sides.
This can’t be duplicated with binaries as you can’t sell and buy the same binary without closing it.
Debit: (Short Butterly) Buy OTM Call Sell ATM Call Sell ATM PUT Buy OTM Put aka long call vertical and long put vertical This is essentially selling what I call a straddle on the spreads - by buying the one above the market and selling the one below the market you expect the market to breakout in one direction or the other further than the sum of both break even distances. Good risk/reward scenario. The longer to expiration the further it must move but the more you will make as strikes are wider.
This can’t be duplicated with binaries as you can’t sell and buy the same binary without closing it.
Debit: Long Call Butterfly - low volatility strategy) Buy OTM Call Sell 2 ATM Calls Buy ITM Call This is essentially selling what I call a straddle on the spreads - - but selling instead of buying both - by selling the one above the market and buying the one below the market you expect the market to stay in the range of the two movements to break even distance combined. The longer to expiration the more premium and the more risk you have as strikes are wider. If it rises you close one side out at premium collected on the other side. But if it then falls you could lose on both sides.
The closest you could get on binaries would be selling the two closest ITM spreads. This would have the same risk/reward graph. (Since binaries are by nature a spread with a floor of 0 and ceiling of 100 they could be considered a spread.) Note you could widen the strikes to increase the range where profit could be made but you would by nature increase risk in doing so. In either case you would need to close it when it touched the strike on either side (both of them) to have the profit on one side help offset the risk on the other). This would require monitoring and babysitting. Not doing so could lead to a larger loss. i.e. sell upper for 40 and buy lower for 60 - $40 reward on one side (60 risk on either side but net risk is only $20 on potential $80 reward). If it goes against you in one direction you lose $60 on one side and make $40 on the other side netting a loss of $20 - not bad for a $80 potential profit ($40 on both sides). This is possible as only one side will expire ITM if this happens. You would need to win 1/3 for this to breakeven more than 1/3 to be profitable (assuming the fill prices i posted). You will get more premium the more time to expiration. But also this means that you have more time for volatility to cause a loss. The closer to opening the better. You could play with it and have take profits as time decays allowing you to take profits. Also you could take off the prfoit on one side and hope it reverses (i.e buy back sold one at 5 - and sell back bought one at 95). Making 35 - with open risk of $40 if it comes back you could close to breakeven, capture a small gain - or the full gain if it full reverses higher probability of getting it filled on oscillations
Out of all butterfly scenarios - I like this one the best for premium collection due to risk/reward scenario and no movement is good and some movement is okay. But reminder it does not take much for it to lose so you need greater than 1/3 to be profitable.
Debit: Long Put Butterfly low volatility strategy ) Buy ITM Put Sell 2 ATM Puts Buy OTM Put With Nadex spreads same thing… This is essentially selling what I call a straddle on the spreads - but selling instead of buying both - by selling the one above the market and buying the one below the market you expect the market to stay in the range of the two movements to break even distance combined. The longer to expiration the more premium and the more risk you have as strikes are wider. If it rises you close one side out at premium collected on the other side. But if it then falls you could lose on both sides.
Same thing on binaries. The closest you could get on binaries would be selling the two closest ITM spreads. This would have the same risk/reward graph. (Since binaries are by nature a spread with a floor of 0 and ceiling of 100 they could be considered a spread.) Note you could widen the strikes to increase the range where profit could be made but you would by nature increase risk in doing so. In either case you would need to close it when it touched the strike on either side (both of them) to have the profit on one side help offset the risk on the other). This would require monitoring and babysitting. Not doing so could lead to a larger loss. i.e. sell upper for 40 and buy lower for 60 - $40 reward on one side (60 risk on either side but net risk is only $20 on potential $80 reward). If it goes against you in one direction you lose $60 on one side and make $40 on the other side netting a loss of $20 - not bad for a $80 potential profit ($40 on both sides). This is possible as only one side will expire ITM if this happens. You would need to win 1/3 for this to breakeven more than 1/3 to be profitable (assuming the fill prices i posted). You will get more premium the more time to expiration. But also this means that you have more time for volatility to cause a loss. The closer to opening the better. You could play with it and have take profits as time decays allowing you to take profits. Also you could take off the prfoit on one side and hope it reverses (i.e buy back sold one at 5 - and sell back bought one at 95). Making 35 - with open risk of $40 if it comes back you could close to breakeven, capture a small gain - or the full gain if it full reverses higher probability of getting it filled on oscillations
Out of all butterfly scenarios - I like this one the best for premium collection due to risk/reward scenario and no movement is good and some movement is okay. But it does not take much for it to lose.
darrell
#5
Debit: Short Call Butterfly - low volatility strategy) Buy OTM Call Sell 2 ATM Calls Buy ITM Call This is essentially selling what I call a straddle on the spreads - by buying the one above the market and selling the one below the market you expect the market to breakout in one direction or the other further than the sum of both break even distances. Good risk/reward scenario. The longer to expiration the further it must move but the more you will make as strikes are wider.
The closest you could get on binaries would be buying the two closest OTM spreads. This would have the same risk/reward graph. (Since binaries are by nature a spread with a floor of 0 and ceiling of 100 they could be considered a spread.) Note you could widen the strikes to increase the range where profit could be made but you would by nature decrease probability of profiting (fortunately this would also decrease risk). This is essentially a strangle - i.e. buy the upper for 40 - sell the lower for 60 - total risk is $80 - if it finished OTM you lose 80 but if it breaks out you make $20 - the wider they are the more this can be balance but also the further they must travel…The other big issue is if the risk reward is not at 1:1 or greater then you will probably have to hold it to expiration to make money on it. A greater than 1:1 on max profit offers the best scenario (ie… risk 10 on each side - close when it hits either strike for $40 profit on one side $10 loss on the other - total risk $20 total profit $30 would be the ideal method - More could be made if held to expiration ie lose 10 on one side and make 90 on other - net 80 but then you risk losing everything if neither side expires ITM
Debit: Short Put Butterfly low volatility strategy ) Buy ITM Put Sell 2 ATM Puts Buy OTM Put This is essentially selling what I call a straddle on the spreads - by buying the one above the market and selling the one below the market you expect the market to breakout in one direction or the other further than the sum of both break even distances. Good risk/reward scenario. The longer to expiration the further it must move but the more you will make as strikes are wider.
Same as above
The closest you could get on binaries would be buying the two closest OTM spreads. This would have the same risk/reward graph. (Since binaries are by nature a spread with a floor of 0 and ceiling of 100 they could be considered a spread.) Note you could widen the strikes to increase the range where profit could be made but you would by nature decrease probability of profiting (fortunately this would also decrease risk). This is essentially a strangle - i.e. buy the upper for 40 - sell the lower for 60 - total risk is $80 - if it finished OTM you lose 80 but if it breaks out you make $20 - the wider they are the more this can be balance but also the further they must travel…The other big issue is if the risk reward is not at 1:1 or greater then you will probably have to hold it to expiration to make money on it. A greater than 1:1 on max profit offers the best scenario (ie… risk 10 on each side - close when it hits either strike for $40 profit on one side $10 loss on the other - total risk $20 total profit $30 would be the ideal method - More could be made if held to expiration ie lose 10 on one side and make 90 on other - net 80 but then you risk losing everything if neither side expires ITM