Net Zero

Broken Wing Butterfly

Presented by Mark Mosley
markmosley919@gmail.com

A direction-neutral approach
inspired by the methods of
Andrew Falde and John Locke
 Rules for Net Zero
Delta-neutral butterfly
1. Enter trade 60-80 days to expiration

2. Select strikes having the deltas closest to 60, 40, and 20 delta

3. Exit trade if any of the following criteria are met:

 Exit trade when middle 40 delta strike changes by 30%
 Exit trade when upper 60 delta strike changes by 30%
 Exit trade at 30 days to expiration regardless

Delta value to monitor 20% change 30% change

(caution) (exit for sure)

.40 ( short center leg) .32 to .48 .3 to .5

.60 (long upper leg) .48 to .72 .4 to .8
Typical Delta-Neutral entry: hedges our bet in either direction
 My modification
to Falde’s basic rules…

ExitExit
trade when
trade when This trade is designed to be
Delta/ Theta
Delta/ Theta ratio ratio exceeds 50-60%
placed without regard to
market direction. Most of the
time, we have no idea which
exceeds 50-60% way the market is going. By
taking a delta-neutral stance at
the beginning of the trade, we
hedge our bets either way
Why Delta/ Theta?

Delta is a measure of directional risk

Theta is a measure of time decay

We always want to be collecting Positive theta $

•Delta/ Theta is a measure of the directional risk we are taking, compared to

the $ we are being paid to take that risk (positive Theta)

• The closer we are to 0, the more tolerant we are of large directional price
moves

•In practice, a certain amount of positive or negative Delta is acceptable as

long as it is small; we measure this with the Delta/Theta Ratio

•If our Delta/Theta Ratio exceeds 50-60 %, we should probably take profits
and exit the trade
 ...and a couple of honorable mentions

Gamma- rate of change of Delta

a risk factor that we manage by entering the trade 55 to 80 days to
expiration, and exiting the trade somewhere between 30 to 20 days to
expiration

Vega- sensitivity to changes in volatility

a risk factor reflecting the sensitivity to changes in implied volatility. In
practice, we may run fairly high Vega numbers. This is not usually a
problem as long as we are positive Theta
Typical Delta-Neutral entry: hedges our bet in either direction
If you are more Bullish, you may consider a butterfly
consisting of the strikes 20,40,~56 which would show
positive Delta at the beginning of the trade.
Simple monitoring of trade from Monitor tab– Similar to TOS smartphone app
AA quick glance at your
mobile device running
Think or Swim mobile
can tell you if your Delta/
Theta ratio is OK…

In this case Delta of 21 divided by

Theta of 144 equals= 14.5% so trade
should be OK
 Case Study
Let's walk through an actual trade:
6 lot trade (6x12x6)
placed on December 20, 2016
February expiration cycle, 58 days to expiration
consumes $21,900 worth of buying power
Case Study- Neutral entry of a 20.40.60 Butterfly entered December 20, 2016
58 days until February 17, 2017 expiration
How to make a million bucks in 2 years…by compounding
-Where to find out more:

 http://optionstribe.com/category/by-
contributor/andrew-falde/
(free short trial)

Falde’s systems workshop. ($1 short trial)

http://www.smbtraining.com/blog/falde-options-
systems-workshop

Paid Seminar in NYC in May on Net Zero-

afalde@smbcap.com

This presentation brought to you by Mark Mosley

markmosley919@gmail.com
If you enjoyed the presentation and would like to make a donation to the
author of this material, my paypal account is under mailmosley@yahoo.com
Thank you , and good luck in your trading.