Paper or plastic? Boxers or briefs? Window or aisle? With ice or without? Weekly or monthly? What? If you are an M3 trader you get it. Let’s leave those other ones out and just tackle this one.
So, which one to choose to hedge the butterfly in the M3 trade? The original M3 program uses monthlies, so should I stick with that or should I now change over to weeklies?
Perplexed? Me too. Let’s dive into this one.
If you trade the M3 butterfly trade, you may have found yourself questioning the idea of buying weekly Calls versus buying monthly Calls. In a high volatility environment, which we are in today, it may not make much of a difference since the cost of the butterflies become cheaper; thus, your trades require less buying power. However, markets change. So, let’s take a look at the pros and cons of this little tweak in the M3 strategy. There is probably much more to add on this topic, but this is what I have found which may help.
Pros (using a weekly):
(In general): Using a weekly Call is less capital intensive on the trade than a monthly Call. You can essentially increase the size of the trade. For example, if you are used to trading a 10 lot butterfly, you can at times trade a 20 lot butterfly for roughly the same amount of buying power. Couple this with the APM course’s capital reduction techniques and you have a much larger trade.
Market drops: (Rolling) The short term Call helps when the market drops since you paid less for the weekly Call versus a monthly Call.
Market drops: (Rolling) When rolling to a new week, I have found at times that when my overall trade becomes delta positive, I can reduce the number of Calls that need to be purchased in the later dated week.
Market drops: (Delta) A large market drop places the Calls closer to ATM which reduces the deltas of the Calls. The now less positive deltas in the Calls make a future down move less “painful” but a huge up move will take in less profit due to the lower positive deltas in the Calls. If the time value is not too high, then your trade can become like a Bearish Butterfly trade especially when the Calls are OTM. This helps on the downside exposure.
Market goes up: (Rolling) You can roll for a credit at times when rolling to the same strike in an up market, a calendar roll.
Market goes up: (Rolling) You may be able to roll up to higher strikes in the new week which creates less downside risk since the strike is not so deep ITM compared to the original Call strike (ie. 1080 Call in Week 1 to 1100 Call in Week 2).
Cons (using a weekly):
When going back and forth between the analyze graph and option chain, you have to keep changing the “Max Projection Date”. This can drive anyone crazy especially in a fast moving market, but there are some tips (see below “Other Points & Tips”).
Market drop: The trade can often become negative theta when price approaches the Call strike. This is due to the spike in time value. You may want to roll down within the same week or roll to the next week.
You have to keep rolling week after week when using a weekly Call, which you must remember.
Other Points & Tips:
The weekly Calls expire on Friday morning; thus, in general it is a good idea to have everything done by mid-week or Thursday, the latest. Some traders use a GTC “good to cancel” order at the beginning of the week for rolling for a small credit to the following week.
When looking at the risk graph, you can type 2017 in the “Max Proj Date” feature. You’ll then have to push enter a couple of times to see the trade with the two different expiration dates.
If you are really frustrated by the “Max Proj Date” feature, click on the month where your butterfly sits and enter the number of Calls at the appropriate delta that matches your weekly delta number. You can now move on, but remember this is for a quick fix to be used only during the day when using the analyze tab. You’ll have to change it back later. Bob Dobrin gave me this idea. Thanks, Bob.
That’s about it. Decide for yourself. I’m using weeklies and haven’t looked back since. Oh yeah, I bring my own bag when shopping, like the aisle, wear boxers (too much info there) and don’t even have ice since I married a European.
Written and contributed by John Wilson