03/13 Fast Iron Butterfly - Backtest results

Ok, the results are in! First, a few disclaimers: This is based on backtest results, they are not representative of exact trading conditions, it simply serves as a baseline for me to decide if a certain idea is worth exploring.

I first had this idea after trading the OEX weekly. I wanted to duplicate the concept of a weekly trading strategy that was not necessarily dependent upon having an underlying with weekly expiration contracts. So I thought about this question for a few days and the answer came one night in a blast of inspiration. Such inspiration was so strong I’ve decided to test it.

My first test was simple: enter a bearish position, if it goes against you, get out, use a short stop (-8%) for exit, and take profits as soon as you make over 8% in ROI. Exit by end of week regardless. So, I tested this for a bit over 1 year, then I listened to a few Sheridan Mentoring sessions where they were talking about a similar concept (yet monthly), the “chain of butterflies”, the key difference was that instead of exiting the trade, the strategy actually opens a new bullish butterfly if the market moves up. I thought hum, there might be something in there for me.. my weekly strategy could be improved...

So I tested again, this time by hedging the position with a single long if down by around 8%, and opening a bullish butterfly at the top. A lot of improvement on the data-set I had tested.

For the past 2 weeks I had the experience with live trading, as it turns out, my recovery butterfly (the bullish one) ended up hurting both times when I needed them. So I started wondering if simply hedging wouldn’t be better. But I do not allow myself to change a strategy before first testing it.. Lesson learned: do not jump from strategy to strategy based on one bad trade, test the new concept, is it indeed better? Or was it an isolated scenario?

Turns out, the best approach is still to hedge and add a second position to recover. I also learned trading live that using butterflies is a pain (they’re hard to get out) so I re-tested with Iron Butterflies instead, the difference isn’t major from testing results, but it is major (in my mind) in Live trading.

So, as you can see on the table, I’ve placed my results side-by-side, and you’ll notice that even though the hedge+recover strategy gives you a smaller average win, and worse win-loss ratio, it bumps your win-ratio a LOT. That more than makes up for it! One final disclaimer, this is based in only 1 year of data (last year), so take with a grain of salt as well. I will not backtest further until I have a better software program in my hands for backtesting..

Cheers!

03/12 Daily Summary

Sometimes you do the right thing for the wrong reasons. I have back-tested the weekly butterfly idea using straight butterflies in lieu of Iron butterflies simply because it is easy to calculate values on my limited TOS thinkback application. I knew the butterflies are not easy to get in and out of, I had even mentioned this to my partner (wife) several weeks ago. Then, because I backtested using butterflies, I started trading live using butterflies, bad decision. Now I am having a heck of a time getting out of those butterflies, I can’t decompose them, if you take one spread at a time, you expose your portfolio to big delta risk, same if you take one contract at a time, the only way to avoid it is by combining a call and put butterfly and exiting them in parts...

So, here I am, talking to my wife about this.. and, of course, she asks the so fatal question: “Why again did you use butterflies? Didn’t you tell me they were hard to get out?”... Touche, my answer? Because sometimes people do stupid things.. Couldn’t figure of a better answer.. ahahah

Well folks, enjoy the weekend, I sure am going to enjoy mine.. I got clearance to spend 4 weekend hours backtesting, so I know I won’t sleep well (too excited), will wake up around 5 AM and start backtesting this weekly iron butterfly strategy, checking the hedge vs. Hedge+recover approach... Yeah, I’m a geek, but hey, whatever rocks your boat :)

03/12 NDX Fast Butterfly (from 03/08)

P/L went down Today, not quite sure why, market didn’t move much, volatility didn’t change much. It may be mainly because of the weekend. Yes, this is another full-deck of butterflies for me to get out of next week.. how fun..

03/12 NDX Fast Butterfly (from 03/01)

You will never find me again opening a straight-butterfly. If you do, feel free to add a comment on the blog, call me stupid (or worse). This trade is my own version of “The Fun House” movie, the tag line reads: Pay to get in, PRAY to get out.. As any Brazilian will recognize the movie’s title in Portuguese: pague para entrar, reze para sair.. Here we go..

I tried, for one full hour to get out of this trade, I had my game-plan laid out as of last night. I figured I had lunch time to work my way out and did the home work the night before.. The reality? Not even the spreads would get filled, when one of them finally got filled, the others refused to cooperate, I quickly dumped the long May call, and then decided to finish off what I started and executed the other spread as single contract orders. One hour and I could only exit ½ of the first butterfly and my long call..

Well, this will work out for the best, just as long as we see the market going down on Monday , I didn’t mind get delta negative because the candle pattern is a “toppish” formation, so I do expect some pulling back. We’ll see, needless to say, the fun house continues.

03/12 OEX Weekly Iron Condor

OEX gave up climbing Today, as Dan would say, the pregnant elephant got tired.. I hate and love this analogy.. Sometime the elephant is on steroids and won’t give up  Ok, cash in the bank, +7.75% ROI, Thank you very much!

03/11 Daily Summary

We keep moving higher despite intra-day pull backs, like a reader pointed out Yesterday, the only thing not fully engaged on this price action is volume. Tomorrow I am planning to exit my NDX butterfly from last week and will keep this week’s position for one more week. Next Monday I’ll enter my traditional NDX and MNX iron butterfly as well as the weekly positions, I’m thinking about replacing the weekly butterfly with a weekly iron butterfly trade, simply because I’m more used to getting in and out of iron butterflies than I am with butterflies.

03/11 NDX Fast Butterfly (from 03/08)

This is a great example on how the hedge-recover strategy can help soften the damage of the trades that do not work. This butterfly would be stopped out under my original idea (-8% ROI), however, because I hedged the trade it is now showing me -4% ROI. Once again, the recovery butterfly is not yet helping, as the hedged+recovery position is down -4.5%.