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I back tested the SPX butterflies for Jan 2001 to Jan 2002 - 12 trades with a next profit of $1564 on ~$4000 max risk. I included slippage and commissions. Not too bad. There was a lot of dVol during that period, and I can imagine that putting the trades on only when volty is high might...

Yip, I stole the graph from an econometrics website, and then edited on the sigmas and other text. I'm not sure what periodicity they used when they calculated the distros. This type of graph can be found in many texts looking at this subject (in front of me I have Poon's book of forecasting vol...

Yip, I've thought about this a bit more, and I'll try to explain better: I've stolen this example from John Hull's textbook. Assume the value of a stock is $20 and pays no dividend. At the end of three months, the stock price will be either $22 or $18. We need to value a European call...

Thanks, I'll look it up. Another good one is Taleb's "Dynamic Hedging" - not too much math, and great explainations of some complex topics. Your point about using a simple model is well explored in Derman's autobiography "My life as a Quant" - a fairly interesting look at one of the pioneers in...

I think that this is a really interesting reality. We (i.e. model users) have consistently ignored more complex models that are more "accurate", in favour of the BSM model with some somewhat "ad hoc" additions to help it match reality better. I find it remarkable that such a simple formula is so...

No problem, I apologize. My two-finger typing style sometimes makes me out to be a bit of an ass (or even more of one perhaps). I can see why it might have sounded that way. I agree with your comments about fair pricing at any current time, and I completely agree that if you are retail...

Nice! I particularly like #3 - it fits well with a strategy I currently use with BWBs. Are you making fun of my kindergarten-like need for pictures?:)

This is a bit of what I've been looking at. It can be modelled in OV - I'll put it on the list. Either of these strategies will be somewhat dependent on your volatility forecast, which is an area I'm trying to sort out. These are cool ideas, and I think that they are just a logical extension...

As I understand you you: 1)Create fly 2)create condor 3)Buy FOTM? Thats an interesting idea. Are you able to put up risk diagrams for your different stages? I think in the OTM article they meant that you put the butterfly on essentially at once. I modelled this for a few months using...

As a simple example, suppose you had a situation where you flip a fair coin and if you get heads, you win double your bet and if you get tails, you lose your bet. Clearly you have an edge: a positive expectation. [/B] How does this give you positive expectancy? Neutral perhaps?

My (limited) experience with flies has been a bit more directional - using "broken wing" butterflies as a direction play - really more of a ratio spread with a hedge than a butterfly. The trimodal greeks of the butterfly have always freaked me out a bit, so I haven't really used them much...

Here's the other half. U

Sorry, beer > typing. Ugly

Here's another idea... Steve Lenz and co published a study in Option Traders Mag about using ATM iron butterflies as a delta neutral +theta strategy. They demonstrated good results (around +25-30% pa). The interesting thig is that they didn't use volatility as a screen. I've attached the...

Apologies for explaining (poorly) what you already know. Once again, all of my answers are provisional, and may possibly be completely wrong... I think that you need to use std deviation as opp'd to a simple mean because probability distributions use variance of measurements as opposed to...

Ugly inside and out, I guess.

Yip, I'll give this one a try, although I am by no means an expert. Please don't assume that my answer is accurate. Hopefully someone smarter can pitch in too. The dynamic replication process (i.e B-S equation and others) demonstrates that you can replicate the pay-out of an option by...

I agree with that statement. I also want to point out, I don't think that these butterflies have + expectancy. I'm just trying enjoying looking deeper at the strategy we are discussing in this thread. How does it feel to finally be the hammer and not the anvil in the "positive expectancy...

Exactly, it would seem to imply you could buy butterflies on either side of the current underlying with the body at 1sigma, and expect.......I want to say positive expectancy, but I'm afraid........an advantage. Similarly, selling at 1 sigma and buying at >2 sigma to create a credit spread might...

Unless you were trying to shill it on ET!!