Capital Discussions
Kevlar Butterflies
James C. Riggio
e-mail: Jim@[Link]
office phone: +1 (561) 265-5541
Disclosures and Important Information
◆ THIS DOCUMENT IS NOT INTENDED AND DOES NOT CONSTITUTE AN OFFER TO SELL
ANY SECURITIES TO ANY PERSON OR A SOLICITATION OF ANY PERSON OF ANY
SECURITIES. THE INFORMATION IN THIS DOCUMENT IS ONLY A BRIEF INTRODUCTION
AND OMITS MOST OF THE INFORMATION MATERIAL NECESSARY TO MAKE A PRUDENT
DECISION WHETHER TO INVEST. YOU SHOULD CONSULT YOUR OWN ADVISORS IN
ORDER TO UNDERSTAND FULLY THE CONSEQUENCES OF INVESTING IN ANY OF THE
INVESTMENTS MENTIONED IN THIS DOCUMENT. AN INVESTMENT IN THIS FUND
INVOLVES A SIGNIFICANT RISK OF LOSS. PAST PERFORMANCE DOES NOT GUARANTEE
OR EVEN IMPLY ANY FUTURE RESULTS. SOME PEOPLE WHO INVEST CAN AND WILL
LOSE SOME OR ALL OF THEIR PRINCIPAL.
◆ THESE SECURITIES HAVE NOT BEEN REGISTERED OR QUALIFIED FOR SALE UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE’S SECURITIES LAWS. THEY ARE
OFFERED PURSUANT TO EXEMPTIONS FROM SUCH REGISTRATION AND
QUALIFICATION. NEITHER THIS CONFIDENTIAL FUND OVERVIEW NOR THE
CONFIDENTIAL OFFERING MEMORANDUM HAVE BEEN FILED WITH OR REVIEWED BY
THE SECURITIES AND EXCHANGE COMMISSION AND NEITHER THAT COMMISSION NOR
ANY STATE SECURITIES ADMINISTRATOR HAS PASSED UPON OR ENDORSED THE
MERITS OF AN INVESTMENT IN THE FUND OR THE ACCURACY OR THE ADEQUACY OF
THE INFORMATION CONTAINED IN THE CONFIDENTIAL OFFERING MEMORANDUM.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. NEITHER THIS
CONFIDENTIAL FUND OVERVIEW NOR THE OFFERING MEMORANDUM DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
INTERESTS IN THIS FUND IN ANY STATE OR JURISDICTION IN WHICH SUCH AN OFFER
OR SOLICITATION IS UNLAWFUL .
Capital Discussions [Link] 2
Disclosures and Important Information
◆ THIS DOCUMENT IS NOT INTENDED AND DOES NOT CONSTITUTE AN OFFER TO SELL
ANY SECURITIES TO ANY PERSON OR A SOLICITATION OF ANY PERSON OF ANY
SECURITIES. THE INFORMATION IN THIS DOCUMENT IS ONLY A BRIEF INTRODUCTION
TO A FEW OF THE HIGHLIGHTS OF THE MEMORANDUM AND OMITS MOST OF THE
INFORMATION MATERIAL NECESSARY TO MAKE A PRUDENT DECISION WHETHER TO
INVEST. YOU SHOULD READ THE ENTIRE MEMORANDUM AND THE PARTNERSHIP
AGREEMENTS VERY CAREFULLY BEFORE MAKING ANY INVESTMENT DECISION. IN
ADDITION, YOU SHOULD CONSULT YOUR OWN ADVISORS IN ORDER TO UNDERSTAND
FULLY THE CONSEQUENCES OF INVESTING IN THESE PARTNERSHIPS. AN INVESTMENT
IN THIS FUND INVOLVES A SIGNIFICANT RISK OF LOSS.
◆ THESE SECURITIES HAVE NOT BEEN REGISTERED OR QUALIFIED FOR SALE UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE’S SECURITIES LAWS. THEY ARE
OFFERED PURSUANT TO EXEMPTIONS FROM SUCH REGISTRATION AND
QUALIFICATION. NEITHER THIS CONFIDENTIAL FUND OVERVIEW NOR THE
CONFIDENTIAL OFFERING MEMORANDUM HAVE BEEN FILED WITH OR REVIEWED BY
THE SECURITIES AND EXCHANGE COMMISSION AND NEITHER THAT COMMISSION NOR
ANY STATE SECURITIES ADMINISTRATOR HAS PASSED UPON OR ENDORSED THE
MERITS OF AN INVESTMENT IN THE FUND OR THE ACCURACY OR THE ADEQUACY OF
THE INFORMATION CONTAINED IN THE CONFIDENTIAL OFFERING MEMORANDUM.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. NEITHER THIS
CONFIDENTIAL FUND OVERVIEW NOR THE OFFERING MEMORANDUM DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
INTERESTS IN THIS FUND IN ANY STATE OR JURISDICTION IN WHICH SUCH AN OFFER
OR SOLICITATION IS UNLAWFUL .
Capital Discussions [Link] 3
Kevlar (Hedged Broken Wing Iron) Butterflies
Agenda
◆ Design Approach
◆ Trade Setup
◆ Trade Management
◆ Trade Exit
◆ Example Trade
Capital Discussions [Link] 4
Capital Discussions: Design Approach
◆ Past performance doesn’t mean jack
◆ Markets change
◆ The High Frequency guys took most “edges” away
◆ Most Strategies (with static rules) that made $$$ in the past…
n DON’T WORK ANYMORE
◆ Trading strategies must adapt to these changing markets
Capital Discussions [Link] 5
Design Approach
◆ Goal
n … for my ROTH IRA
1. $5,000 wouldn’t make a
difference in my life
2. … but $500,000 in a tax-
free ROTH IRA would!
◆ Objective
1. Add $6,500 every year until I’m 59 ½. (I am 51 years old)
2. High Risk / Higher Returns
3. $500,00 by the time I am 59 ½ years old.
Capital Discussions [Link] 6
Design Approach
◆ Can you define your edge?
◆ Markets change…
◆ How sustainable is your edge?
◆ Understand and play the probabilities
◆ Know your risk tolerance level
◆ Design trade for the specific underlying
n Implied Volatility
Negative Volatility Skews or Put Skew
◆
Volatility Term Structure
◆
n Liquidity
◆ Trade the market you have, not the market you image
Capital Discussions [Link] 7
Trade Setup / Trade Management / Trade Exit
◆ Go read the Disclosure again
◆ Trading options is not easy
◆ Many of you will lose money…
until you “master the craft”
◆ If you do try this at home… TRADE SMALL!
n As Dad said… “Do as I say, not as I do.”
Capital Discussions [Link] 8
Trade Setup
◆ Underlying: SPX
◆ Capital Allocation: (Huge Risk)
n Max IRA Margin = Account Value
◆ Timing: 45 to 28 DTE (days to expiration)
n Best with higher IV and steeper (i.e., more negative) Put Vol Skews
◆ Target Profit:
n Significantly above the money: Break Even (difficult, but hopefully)
n Slightly above the money: 0-5%
n At the money: 5-10%
n Slightly below the money: 10-15%
n Significantly below the money: 15-20%
n Market crash: Break Even (difficult, but hopefully)
◆ Max Loss: 20% (again hopefully)
Capital Discussions [Link] 9
Trade Setup (Trade Structure per tranche)
◆ 2 or 3 Broken Wing Iron Butterflies (BWIB)
◆ BWIB centered near a Put Delta of 30 and Call Delta of 70
n Call wing length: approx. 5 SDs (daily SDs)
n Put wing length: approx. 7 SDs
n Try to use 25 point strikes
n Depending on VIX and Put Skew:
◆ Low VIX => Call wing: 50 points wide and Put wing 75 points wide
◆ Mid VIX => Call wing: 75 points wide and Put wing 100 points wide
◆ High VIX => ???
n ATM should be approx. 5 to 25% up the Call wing of BWIB
n Greeks Notes:
◆ Delta slightly negative (approx. -5 to -15 per tranche)
◆ Theta positive (approx. +15 to +30 per tranche)
Capital Discussions [Link] 10
Trade Management (Downside Adjustments)
When? (triggered based on Position Delta per tranche)
◆ When SPX price reaches center of BWIB or…
◆ During first two weeks: when Delta turns positive
◆ Thereafter: Delta > 5 to 10
Adjustments
◆ Buy broken wing Put butterflies, where:
n Long Put wing: buy back original short Put BWIB wing
n Short
Put wing: ½ length of original short Put BWIB wing
◆ Buy enough Put butterflies to turn the Delta negative
Capital Discussions [Link] 11
Trade Management (Upside Adjustments)
When? (triggered based on Position Delta per tranche)
◆ 1st week: do NOTHING.
◆ 2nd week: if ATM is above long call strike for three to five days.
◆ Thereafter: if ATM is above long call strike or if Delta < 15 to 25
Adjustments
◆ Buy broken wing Call condor, where:
n Long Call wing: buy back original short Call BWIB wing
n Short Call wing: ½ length of original short Call BWIB wing
◆ Short strike of short Call wing should have a Delta between 20 and 25
◆ Buy enough Call condors to cut Delta between -5 and -20
n Early in the trade less negative; Later, more negative
Capital Discussions [Link] 12
Trade Management
Greek NOTES
◆ Keep Delta slightly negative to counteract negative Vega.
◆ Later in the trade, consider rolling the long BWIB Puts higher
n This is because Gamma increases more rapidly closer to Expiration
n Rolling the long Puts up will drastically reduce Margin required
n ... And rolling will allow us to start next months trade earlier
Capital Discussions [Link] 13
Trade Exit
Taking Profits
◆ Start exiting taking profits once Profit reaches 20% or 14 DTE
using "peel process”
◆ The "peel process" refers to
n Only using close existing strikes. NO new strike should be opened.
n Or opening Put or Call wings for next month trade
Trade Exit
◆ Exit trade immediately if Max Loss is reached
◆ Exit trade completely during expiration week
◆ Decide to leave to expire: “Read the SPX options tea leaves”
Capital Discussions [Link] 14
Kevlar Butterfly Trade Examples
◆ OptionVue Example
◆ LiveVolX (Put Skew & Risk Analysis)
◆ Thinkorswim: (Risk Analysis)
n Greek calculations issue?
Capital Discussions [Link] 15
Capital Discussions
Capital Discussions [Link] 16
Capital Discussions / SPX Kevlar Slides
Capital Discussions [Link] 17
Capital Discussions: Current Status / ROTH IRA
Month / Yr Deposit Acct Balance % Change
◆ Remember: Past
June 1,2013* $5,031.68 performance doesn’t
*Starting Balance
mean anything!
Jun, 2013 $0 $6,867.12 36.5%
◆ Will I be able to replicate
Jul $0 $8,217.17 19.7% this performance?
Aug $0 $8,109.18 (1.3%) ◆ I don’t have a clue!
Sept $0 $7,235.30 (10.8%) ◆ My Goal?
Oct $0 $9,183.63 26.9% ◆ $500,000 in 8 years
Nov $0 $11,460.63 24.8%
Dec $6,500 $22,531.86 39.9%
Jan, 2014 $0 $21,647.89 (3.9%)
Feb $0 $22,001.53 1.6%
Mar $0 $25,403.07 15.5%
Apr $0 $25,560.98 0.6%
May $0 $23,671.65 (7.4%)
Capital Discussions [Link] 18
How Can I Beat the High Frequency guys?
High Frequency guys are Engineers.
Engineers put a man on the moon
… before they put wheels on luggage.
Capital Discussions [Link] 19
Capital Discussions
Kevlar Butterflies
James C. Riggio
e-mail: Jim@[Link]
office phone: +1 (561) 265-5541
