Thursday, March 11, 2010

03/11 NDX Fast Butterfly (from 03/01)

If you have been following this weekly butterfly strategy, I made a tweak last week with adding a hedge-recover process instead of a flat stop loss at the -8% level. This has kept me in the game on last week’s butterfly. I have to exit the position Tomorrow and record the findings.
One of the things that called my attention is the fact that the recovery butterfly didn’t help much this time around, look at both my charts, if I had just hedged the trade, it would be in the green by now. My recovery butterfly is actually damaging the position. I will have to back-test it once again and look at what is the difference if I’d simply hedged the trade instead of adding the extra capital for the recovery. This could be an exception and I don’t want to adjust my trading strategy based on one month, specially because NDX is moving higher and the vols are staying relatively high and Yesterday it actually moved higher as well.


Anonymous said...

Hi Gustavo,
This is exactly what I am looking at, (Either hedge or add another Butterfly?) at the moment and will backtest this weekend when I have more time.
Will look forward to seeing your conclusion as well. I am trading a monthly so will be interesting to see how it compares with your weekly.


Gustavo's Trades said...

Hi DZ, it makes sense to evaluate both alternatives. One thing I want to point out as a key difference between weekly vs. monthly is the "time to benefit".

I'm looking to get out of these weekly trades as soon as possible, within a week if the market allows. So, a simple hedge makes good sense as I won't allow a lot of time-decay to dissipate my hedging ability. Plus, it seems that adding another butterfly for a short-term solution isn't quite the way to go (despite promissing backtesting).

For my monthly NDX/MNX Iron Butterfly strategy, I absolutelly use both actions (Hedge+Recover). First I hedge with contingent orders, then I look at way to increase my theta, either by adding another butterfly or by rolling. The reason this makes sense to me is that there is usually time for the trade to recover, and if I'm staying longer, I must be looking for ways to actually bring in $$ in the form of theta..

Hope this helps, I plan on testing the hedge-only alternative and will publish my findings. If I can convince my wife for 4 hours Tomorrow :)