2020: Butterfly Spread Thread

[ffs1001]

@jamesbp thanks for taking the time out to reply. I apologise if I am struggling to understand basics or being overly persistent.

#1 short 3250 straddle v long 3200-3300 strangle
Yep, an iron fly is essentially a short straddle, but with a protective strangle to give it defined risk. However, I wouldn't trade one without the other - then it's not an iron fly. And if was to sell a short straddle and then later on buy a strangle, then it's just me morphing one trade into another - similar to if I had a long call, and then later on decide to sell a further out call and create a debit call spread. Where's the synthetic part to this?

#2 short 3200-3250 put spread v short 3250-3300 call spread
Yep, I did this many times a couple of years ago when I was trading IF's on TLT - if the underlying would move up a lot, then I would close out the put side of the fly and wait for mean-reversion to later close out the call side.

#3 long 3200-3250-3300 Call Fly
#4 long 3200-3250-3300 Put Fly

Again, this is just changing one trade type into another. It's like if I sold a credit call spread in the SPX at say 3250-3300, and then later I bought a second call at 3300, now I would have a short call at 3250 and two long calls at 3300 - a call ratio backspread. I still don't understand what's synthetic about this as opposed to 'natural'?

I trade commodity futures, and use synthetics there - so, rather than buying a simple long call option, I would for example, buy the outright future and a long put. Basically,
Long future + long put = long call.

So, a synthetic to me is where two or more financial products are combined to mimic the behaviour of another.

Maybe this is why I struggle to understand the liberal use of the word synthetic on many threads here?

(I saw one post last year, where a guy was saying that he had a "synthetic short call" and when queried, it transpired that he did not have enough margin in his account for short calls, so he had sold a credit call spread.)

 

[jamesbp]

Maybe this is why I struggle to understand the liberal use of the word synthetic on many threads here?

You seem to have a pretty good handle on the synthetics
... I think RiskArb had a thread some years ago where he morphed short straddles into flies

Let's take a hypothetical example, say you ended up with the following position

-2c 3300 / +2c 3400 / -1c 3500 / -2p 3500 / +1p 3600

How would you see this position synthetically ?
What one trade would you make if you thought the market was about to crash ?

 

[.sigma]

Many Iron Flys are legged into. I have shorted straddles and and then legged into the long strangle at a lower price after change in value or IV in the underlying.

IV is as important a consideration in putting on FLYs as strike selection

shorting the straddle then long the strangle.

so you’re talking about iron fly?

also coach, I did some digging and found a butterfly journal by you, sadly it was only a few pages but started off strong.

 

[.sigma]

I see a lot of talk on this forum regarding synthetics, with one particular very well-known character always talking about synthetic this and synthetic that - I was waiting for him to one day state that synthetic bananas are equal to natural oranges, but I think he's left the building.")

im trying to think who this may be lol

 

[ffs1001]

2c 3300 / +2c 3400 / -1c 3500 / -2p 3500 / +1p 3600

This is :
- credit call spread (3300-3400)
- naked straddle (3500)
- debit put spread (3600-3500)

What one trade would you make if you thought the market was about to crash ?

I'd :
1) buy long puts in SPX (or long puts in VXX)
[ or 2) buy debit put spreads or
3) do some sort of ratio put spread where I have more longs than shorts.]


I'm sure the official answer is far more intricate than the simple options I have listed above.

Regards

 

[jamesbp]

I'm sure the official answer is far more intricate than the simple options I have listed above.
Regards

There is no one particular Position Dissection ... just one that works for you
I have the position as

+1 x 32-32-34 Fly
+1 x 34-35-36 Fly
-1 x 32-35 strangle

 

[ffs1001]

I have the position as

+1 x 32-32-34 Fly
+1 x 34-35-36 Fly
-1 x 32-35 strangle

Okay, I see. How does this labelling now help us trade better?

This is the bit that I cannot seem to comprehend. We can have different labels for this structure, "-2c 3300 / +2c 3400 / -1c 3500 / -2p 3500 / +1p 3600"
but in the end, the position is the same whether we choose to see it as two flies and a strangle or two spreads and a straddle.

I sense that seeing it as two flies means that we can do adjustments differently than if we saw it as credit/debit spreads. But are one set of adjustments better than the other? And I'm still confused as to what is synthetic here?

 

[.sigma]

"For equity fly's, the put often is either overpriced or underpriced. Your iron butterfly contains a "normal" skew, and you need to know what that is.

When the put trades over a 6% discount in IV terms, this is a favorable time to enter an iron fly. If it trades at a 10% discount to IV, this is an excellent time to enter the trade. When the put skew is flat, the trade will be short and very likely a profitable one."

Can anyone explain what this means? What does this author mean when he says "when the put trades at a 6% discount in IV terms?

 

[.sigma]

IV is as important a consideration in putting on FLYs as strike selection

And this is what I need to work on.

When I trade a fly, its purely based off where I believe spot will be at X time.

I don't know how to trade fly's based off volatility, yet. I see Dest, TBS, sle, coach, bone, noregrets, and others trade fly's purely off vol, and its very intriguing and interesting, I've read countless threads and still haven't grasped the concept just yet. Keep it coming!

 

[taowave]

I think you know how to trade off Vol,you just dont know it...

This is why its best to break things down to its simplest components..

You must have an idea of what cheap vs rich is on flys or verticals..

You can do it by simple probability/risk reward analysis,or you can do it by the greeks,with vol a major factor in pricing..

IMHO alot of people get lost in the greeks an dont have a good intuitive understanding of the position.They just look at Vol up or down,but dont quite comprehend why vol going up or down helps/hurts their position.

For instance,does a big jump in vol go hand in hand with an increase in the value of all flys and why or why not?