2020: Butterfly Spread Thread

.sigma

.sigma

Lets get a new discussion going on fly's for the new year. Lets build a knowledge base and create newfound knowledge from past threads, and learn and understand this wonderful strategy more.

Why would one trade an iron fly over the normal call/put fly?

Obviously the iron is net credit and the call/put fly is net debit. It also depends where one is positioning the strikes for this trade. Are we neutral on price from the beginning? Or are we predicting price will "pin" a range by a certain time next week?

I'm assuming it depends on the implied volatility of the underlying when choosing the ironfly over the bfly? The higher vol makes the iron more appealing because of bigger credit/wider breakevens? Please correct me if I'm wrong, lets get a discussion going.
 
I also view the iron fly as a straddle being strangled.

Yet this discussion can change if we are talking about iron fly's on a product like the $SPX.

Skew being a blatant factor in this monster, we know the key to success is what price you pay for the strangle. This is why iron fly's might be more successful in low-vol, as long as the relative relationship of the wings is inexpensive compared to the body.
 
Iron vs natural (c/p) fly are synthetically equivalent. There are only two reasons why one would trade one over the other. First, if the underlying pays a dividend, you would opt for the put fly or the iron, so as not to be exposed to exercise risk on any calls. Moreover, if close to expiry you want any long options to be otm. Second, and most important, I would opt for the fly that is more liquid, or fills easiest. Depending on which strike(s) are atm, a given fly may fill at a better price, typically the iron in most cases, since deep itm options tend to be wider. I always look at bid/ask width of irons, calls, puts, and opt for the structure that is the tightest. Theoretically the iron should be at the midpoint of the call/put fly, but microstructure and order flow could potentially distort this.
 
Maybe this will help a bit..

Condors,Flys and Iron are brothers from the same mother..They are closely related and almost identical..

Example..

100 stock
Short the 95-90 put spread
Short the 105-110 call spread

Difference between short strikes is 10 points and width of verticaI is 5 points.

Stay with me..

Now divide the Difference between short strikes by the width of vertical.

Add 1 to that number,and that's how many butterfly are stacked on top of each other

Here we go

10 points distance between short strike

Divide width of vertical which is 5 into 10.

Take that number which is 2 and add 1..3 is the number of flys in the 105-110 call/ 95-90 put condor.

To check,write down the 110/105/100 fly. Then the 105/100/95.finish with the 100/95/90 fly. Net the individual legs and see what you come up with..

Play around with different condors widths and you should be able to calculate how many Flys there are,and how much you are paying for each fly
 
BOT 7 FEB 20 3260/3240/3220 PUTFLY 242 @ 1.80 R

Yesterday.
 

Attachments

  • SPX FLY.PNG
    SPX FLY.PNG
    173.4 KB · Views: 72
Do you guys look at IV as it pertains to what type of fly you construct? I'm assuming yes?

For example, an ATM ironfly, I've read that IV does not necessarily need to be "high", just higher than the ATR of the underlying?

Thus, ATM iron's can be traded in any vol environment, expecting IV>ATR(RealizedVol?)

I still don't fully understand why choose the iron over the long put/call fly?

Also I'm curious if anyone trades iron fly's OTM?
 
taowave said:
....Take that number which is 2 and add 1..3 is the number of flys in the 105-110 call/ 95-90 put condor.

To check,write down the 110/105/100 fly. Then the 105/100/95.finish with the 100/95/90 fly. Net the individual legs and see what you come up with..
More...

@taowave, this is interesting.
But a question - how does one actually use this information to get a better trade setup?

Or is it just an mathematical curiosity?

Cheers
 
I’m curious if anyone knows some statistics on the P/L path an ATM fly usually takes?

for example, how often is a fly in the negative through the duration of the trade?

how often is it negative? I know this is all relative
 
@noregrets in regards to irons vs vanilla fly

”it all depends on my outlook for the underlying. When I expect the underlying to stay relatively stationary and/or for IV to drop, I may put on a regular butterfly that is ATM or close to ATM. I will often choose the iron over the call or put fly because the microstructure often allows a better or easier fill, especially if your body strike goes ITM during the course of the trade. I may use a broken-wing, or asymmetric, fly if I am seeking to attempt to "extract" skew by selling more expensive (IV-wise) strikes that are away-from-the-money, and can adjust the strikes to place me in a, relatively speaking, neutral or bullish/bearish position depending on my outlook for the underlying. I do always try to keep a symmetrical risk profile for those. I will use the IC if my outlook for the underlying is that it will remain rangebound and/or I expect an IV drop. I model all the potential trades (generally using flies) and compare to flat skew.”
 
You must log in or register to reply here.
Back
Top