An other way of scaling in and out is to it with options. As I recently had a discussion with a friend about it ( Munde ), I will post here a copy of that :
Hi Munde
Hope you do not mind as I really confronted and provoked you with not usual questions and comments. Tried to bring your knowledge at his limit. Most do not ask such questions. Most implement Broken Wing Butterfly's as it is explained all over. You will not find many books or sources, which will show you how to implement a BWB in that way, that it is over the zero line.
To come to the point : If I trade a BWB, I leg in. There are different ways to do that. The main target is to bring the BWB over the zero line. The BWB was not made in the S&P 500. It was made in the Euro ( I posted that wrong in the other post )
http://i55.tinypic.com/11rrfx3.png
http://i53.tinypic.com/1610rpd.png
- If you compare our risk pictures, you see, that I am over the zero line and that I can leave my BWB and start an other trade. I am 100 % out of any risk and if I now want, I can wait until expiration with just doing nothing. If market closes over 1.4569, I make money and if it closes under 1.4569, I make money. We made USD 180, as market closed higher as we expected. If market would have closed around 1.4400, we would get up to USD 2'000.-- per position.
- On the other hand, your picture shows, that you have to watch your BWB, as you have your break evens on both sides ( 5300 and 5950 ), which when past, brings you in danger. As you say right, you then have to adjust according to the market and as you say by your self, you do that professionally. As you also say, you make money with that strategy in that way and it seems for me logical, as you have a huge range of 650 point, at least in that example. The way you implement your BWB is build on other thought, than my one is. Both ways are fair strategies and both ways have an outcome. So never mind about it. You are a pro in your home market and you know how to handle your market in a perfect way. Just to clear that.
Me on the other hand, I just feel more comfortable, when a BWB is over the zero line. It is not always possible, but when you have a few of them and you have to watch them all, because they are not over the zero line, I hate that.
Now, how to bring them over the zero line is the question ?
What I post now is probably not possible in Indian market, as the Indian market, when it comes to options, is not very developed. There are a few ways to bring a BWB over the zero line. I will explain here just one way :
First, have an idea in what range a market trades in a certain time frame. It is important, that those swings are completed in that time frame, other wise we not can finish the BWB and we have to trade other strategies. That is why I prefer to leg in the market, when it comes to complexer strategies. I am more flexible and I can adjust my idea to what the market is doing. If I implement the whole strategy at once, I am stuck with that strategy. Some times I also implement more legs than one, but never a full finished strategy. You will see.
If you see the range, make your math first before you implement or place any orders !! Very, very important !
To do your math, you need to check the option prices. Munde, you ask about from where I got the picture. It is from Opvue and Opvue also shows me all the strike levels in any commodity at the CME. That is the way it looks :
http://i51.tinypic.com/kbyhpi.png
You see all the strike levels and other relevant details like Market price, MIV, Delta, Volume and so on. There are many more hidden possibilities. As we know the range we want to trade, we now check the option prices on those levels and the ones between. We create a small trading plan for that specific trade.
In that example we trade the US Treasury Bond. The range is 115 to 118. and the market is in an up move. That is why we choose the calls in that specific example. We now quickly calculate how much money we have to pay for the long calls. Now we have a sum X. That is the money, which we have to pay and which is on risk. But we want to take the risk out of the trade by bringing it over the zero line. As we do BWB, we do not choose the strike in the middle of the range. We place it in that way, that we are more open to the upper side and so in this example we choose the 117 call, which we will sell.
As it is a Broken Wing Butterfly, we need at least four options to complete the strategy. Here we choosed one 115 call, two 117 calls and one 118 call. 115 call and 118 call cost us the sum X which we need to bring back to us with the sell of two 117 calls. That is pure math and not very difficult. But now we need the idea !!
What we do is, we buy the 115 call and the 118 call and sell just one 117 call. After we got the filed for that, we clearly see, how much money is left on the risk floor. The sum X from the long calls minus the sum from the one 117 call is that risk money and that is the money we need to bring us over the zero line.
So we place an order by the broker, which is a sell limit order for the second 117 call. The limit price for that 117 call must be at least the money we need to take the risk away from the floor. ** At the moment we are filled, we finished this beautiful BWB and can move on.
Notice : ** Be careful and realistic here. If you start to get greedy and place a limit price, which is not adequate to the possible move in the market, you do not get filled and you have to find ways to get out of your not finished implemented strategy. But this is an other chapter.
Probably not makable in your market, but you see what you can do in other markets.
Have a nice day
DanPickUp