What's different about these two at-the-money butterflies hedged with a call debit spread, priced on Thursday, May 15?

First ATM Butterfly with Negative Deltas Reduced by about Half, Graph from OptionNet Explorer:

Second ATM Butterfly with Negative Deltas Reduced by about Half, Graph from OptionNET Explorer:

The answer? There's not a lot of difference in performance, cost or margin shown here. However, on that particular day, the call debit spread used in the second graph might have been slightly easier to fill than the one used in the first graph.

Both graphs display ATM RUT all-put butterflies centered at 1090 when the RUT was at 1090.52. Both employ a single call debit spread that is ten points wide, a +1 1070/-1 1080 call debit spread in the first graph and a +1 1080/-1 1090 call debit spread in the second one. The different call spreads of course produce slightly different Greeks, but the differences are minor, as are any differences in expiration breakeven. The costs for the two butterflies differs by about $55.00.

The evidence is too anecdotal to be certain, but I and other traders have noticed that we sometimes have problems trading an ITM call debit spread, especially on low-volume days or days when there's much uncertainty in the markets. We can sometimes get quicker fills if we choose a different call spread with at least one of the legs being ATM or at another strike that's seeing a lot of volume that day.

If you're hedging trades with call or put spreads and you're having trouble getting a fill, you might model a different spread and try that one. Of course, if you're trying to exit a spread that you already own, that's not a possibility.

Market direction may also make it more difficult for you to either buy or sell a spread. Let's look at why that might happen. On the afternoon of Thursday, May 15, the RUT was bouncing off a morning low. I did not enter either of the two positions shown on these graphs, as these aren't my preferred butterfly setups. However, some butterfly traders do like to trade ATM butterflies. ATM butterflies are always negative delta trades. Some traders will raise the deltas a bit so that the profit-and-loss line curves evenly to either side of the current price at entry. They may do that by buying a call or buying a call debit spread. Others will unbalance the butterfly, but that causes double margining on some platforms.

When we put in an order to buy a call debit spread, we're putting in an order to buy long deltas, among other things. Our order will be matched by someone else. We're asking that someone else (or a couple of someone else's, depending on your underlying and where and how it's filled) to take the position opposite ours. Remember what the RUT was doing that afternoon of May 15? It was jumping higher after hitting a day's low in the morning. Let's look at the position we're asking someone else to take when we try to buy a call debit spread that afternoon, while the RUT is jumping higher.

Position Opposite Our Hypothetical +1 1080 Call/-1 1090 Call, Graph from OptionNet Explorer:

Would you be eager to take that position opposite ours on an afternoon when the RUT is jumping higher after hitting a morning low that was retesting a low from months ago? In order to get that fill, you're very likely going to pay a price over the mid-price between the bid and the ask, or you may have to wait for a little pullback in order to get the order filled. Unfortunately, sometimes when there's a little pullback, the implied volatilities go up momentarily and bid/ask spreads are widened. The price of the positive-vega call debit spread actually goes up when it should, seemingly, go down. If the pullback deepens, the price of the call debit spread will respond, but a minor pullback or pause might surprisingly momentarily plump up the price rather than decrease it.

Your choice, then, might be to pony up and make an offer above the mark or mid-price, wait for a pullback that lasts more than a couple of minutes, or end up chasing the price. Although I did not enter the ATM butterfly trade discussed in this article that day, I did enter a different butterfly trade that included four hedging contracts of 1070/1090 call debit spreads. I see from my order history that I did a little bit of chasing myself that afternoon. My first order for that call debit spread was placed at a debit of $12.20. A few minutes later, the price had risen considerably. That order was cancelled and another placed, and was filled for $12.50.

I had learned my lesson through many trades, however, and I didn't mess around trying to get a fill at the mark. It was the last component of my trade, and I needed it to hedge upside risk. By an hour later, that debit spread's price had risen above $13.00. The $12.50 price I paid was above the $12.20 I originally wanted to pay, but it was well below what I could have paid if I'd kept chasing it.

Thinking about my experience that afternoon leads to another random thought. You can be "penny wise and pound foolish" with options trading. There's a time to be chary about the price you'll pay, and there are other times when doing so leaves you chasing prices and paying far more (or suffering far higher losses) than you would have if you'd just paid the extra $0.10 per contract when you first entered the trade.

Whether you're chary about the prices you'll pay depend on the market environment and the type of trade you're making. A day trader who has just received the signal of a breakout trade may be willing to pay a little more than the mark in order to get a quick entry and not miss the move. In contrast, a trader who specializes in iron condors placed 60-70 days before expiration may not be willing to enter the trade unless a certain credit can be obtained, and so may work the order for hours or maybe even days before getting a fill. I remember times in the mid-2000's when implied volatilities stayed extremely low and it was difficult to get enough credit to make an iron condor worthwhile. I often had entry orders sitting for several days during those years.

You may not want to be so chary with prices when your complex trade has many parts and you've entered or exited all but one part, leaving the trade unbalanced. You probably want to fill that last part as soon as possible in case the market should move against you. Also, you probably shouldn't be too chary with your price when your max loss has been hit and the underlying is moving against you. You want out. Not out at any price, of course, but out as soon as possible.

Each vehicle and strategy is different. You'll learn when it's easy to get fills and when you'd better pony up a few extra cents per contract just to get the fill done. My examples above were not meant to be guidance for you in any and every situation but were rather meant to start you thinking about how you'll address such situations.

Linda Piazza