Butterfly Skepticism (Part 2)

The presentations I see on butterfly strategies often get my skeptical juices flowing.

I will not accept edge that occurs at one particular DTE and not another because I think this is one of the great fallacies in all of option trading (see here and here). I find many butterfly strategies to be guilty of this.

From across the mountaintop, the plethora of butterfly trading plans look like an attempt to place Band Aids in all combinations over any potential risk including high/low underlying price, volatility, or days to expiration. I think any advanced trader would recognize this as the Holy Grail or a flat position. The former is a mirage that does not exist. The latter poses no risk with no opportunity for reward. Any statistically-minded trader might recognize this as curve-fitting: trying different things until you find one that works perfectly. Despite that perfect match to past data, curve-fit systems are unlikely to work in the future. Also by [statistical] chance alone, every 20 attempts is likely to produce one success [alpha = 0.05].

Studying butterflies was one of my early reasons for wanting an automated backtester. Of all the butterfly trading plans I have seen pitched, many were accompanied with no backtesting at all (optionScam.com). Some of them have limited backtesting, which I have often found to be vulnerable to criticism (e.g. transaction fees not included, insufficient sample sizes, limited subset of market environments studied, survivorship bias, no OOS validation). I want to be able to take a defined trading plan and backtest it comprehensively.

For different reasons, many butterfly trading plans cannot be backtested. Some are complex enough to fall prey to the curse of dimensionality (discussed and here and here). Some trading plans emphasize multiple positions in the whole portfolio placed over long periods of time to properly hedge each other. Chewing up such a large time interval for a single instance will only allow for a small number of total instances that cannot be divided up in sufficient sample size for the different categories of market environments. Some trading plans are specific enough to be curve-fit (worthless). Other trading plans incorporate discretion. For all practical purposes, discretion can never be backtested. Any discretionary plan thereby becomes a story, which falls into the domain of sales, rapport building, advertising, and marketing (optionScam.com?). I alluded to this in the second-to-last paragraph here.

I have yet to trade butterflies with any consistency because I do not even know if they are better than naked puts, which I consider the most basic of option trades. At the very least, the automated backtester research plan should be able to address this.