Thread by @frankoz95967943

Options - the next generation - managing butterflies - when good times roll / when bad times come...
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Say you bought a simple balanced butterfly spread on 1/5 that looks like this

Its balanced, and theta neutral

Then 1/6 happened (Partaeeee)
You got a near 30% change in every leg.

What should you do - sell it?
Manage it?
Or do nothing?

I would manage it - you can close out that middle leg buying 2calls back, and open 2 new legs that are MORE than what you paid for the top and bottom leg, cover exchange fees and the position now becomes free.

You would do this only if you got a lot of time left on spread

In this case, you are out to march23, 2 more months to manage it.

If you thought the market move was total bunk, well, there is another way to manage it

(and there is a reason i think market move is bunk - second picture). Spy popped and flopped, but price stayed hi. #WEIRD

Ok -thats all great if sky is blue, sunshine, glitter...but thats not what happens every day - what if market went the other way?
We have the same setup, but now options dropped by 30%+

Well, it it happened in the overnite, nothing we can do.

But this is a major part of WHY YOU ONLY DO SPREADS IN A MARKET LIKE THIS

You are out of pocket 100$

After that 30% drop overnite? Meh.
Look at what happened to butterfly now?

You spent 128.
After 30% drop - now you down $20.
Big woop.

But some defense moves if you want

Remember - we got 2 months to work this thing, looking at whats going on w/ spy, my bet is its going to continue to chop around...

But, defense move
a) just sell the whole spread and be done with it
b) change it to a CREDIT spread from a debit spread.
c) just wait and do nothing

b) change it to a credit spread - ez
Now you have a condor credit spread
these options will bleed, but they CAN go the other way.

You buyback 1 of the 385 and sell 1@379.

With the choppyness of these markets, im really not sure id make any move until i saw a clear direction.

If it were me, id prolly take my gains and run (SELL!) - close the position and wait for another extreme position (like EOD FRI or EOD Thurs) to plot a new entry opposite of market.
Notice the MASSIVE chop in the overnight session.
Its just nuts.

If i were down, id set a stop loss and live with it.
But prolly not change my position.
you got 2 months to work it.

Longer dated options would have been better.

Say june or july - the OP manipulation dont work so good out there...