Comparing strategies - Yield Grab, “Tighten the Noose” etc
Written on April 30, 2008 by OptionsRopeaDope
On the CBOE website a very interesting webcast popped up, “Options Strategy Series Part II: Butterfly Spreads featuring Steve Papale” by Steve Papale. (You can find it at the OIC website, click “Guest/Faculty Archives.” It covers butterflies, including something I never thought about - because of the volatility skew, butterflies on indexes and equities actually always have a slightly negative delta. Interesting.
The most interesting thing though is the comparison of three different strategies for profit taking. In each case, the butterflies were opened on the second friday of the month (one month ahead), then closed the next second friday while another was opened like clockwork. The period covered from January 2002 through the end of 2007, so it included a massive selloff through 2002, then the steady bull through 2007. In each case an extra OTM call was purchased to even the deltas, not sure how that factored into the results though. The OTM long was “just inside” the 1st Std Dev. Here were the three approaches:
- Let the trades run as described above - keep open until the second friday of the month no matter what.
- Close the trade when: a 10% profit is realized, or when the underlying touches one of the long strikes in the butterfly.
- Close the trade when: same as above, except keep a trailing stop of 5% on the profit amount (when 10% is reached, close if drops to 5%, if 15%, close if it retreats to 10%, etc.) The idea is to let profits run.
The results are in the screenshot below. The “Seasonal” is the first option, and very erratic. The smoothest option is actually the “Yield Grab”, or close at 10%, which had a yearly ROR of about 25%. If nothing else, goes to show a risk management plan and how it can influence returns. As Dan Sheridan says “never say, ‘let’s put this on and see what happens!’”
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