2020: Butterfly Spread Thread

[taowave]

Its really not terribly helpful other than to get a slightly better understanding of Flys vs condors..

When I traded on the exchange floor and didnt have delta sheets/Greeks,I had to come up with home brewed formulas to help me make markets..

I actually traded condors/ verticals in decent size and would trade them/roll with butterflys..

Wish I had better news

@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

@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

 

[ffs1001]

Thanks Taowave for a honest response.

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.

All this breaking down of a position into it's individual parts is alluded to on ET quite a lot, but I have yet to find a single post where someone can explain what the trading benefit is for example splitting up an Iron Fly into it's components.

(I'm asking from a position of curiosity and not negativity - I'm not saying there is no benefit, I'm just asking "what is it?")

 

[El OchoCinco]

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

 

[ffs1001]

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

This ^ 100%.

I traded a lot of iron flies last year. I started a thread hoping to get some sensible discussion going, (https://www.elitetrader.com/et/threads/spx-iron-flies.333392/) but quickly left it cos of the sheer negativity and condescension in the responses. On a side note, I'd like to see if some of those big name C U Next TuesdayS turn up on this thread and make some meaningful contribution.

Anyway, I digress. For me, IF's are best traded when the vol is higher than normal and expected to fall, or at least not rise. Another week or so of instability and I will start getting back into IF's. They can be structured to have a wide profit range. The threat of course is big moves of the underlying. I only ever traded SPX flies for numerous reasons :
- cash settled
- no dividend risk
- no company specific risk (fraud revelation, CFO sleeping with the 21 year old intern etc)
- massive volumes and tight spreads.
- hugely scalable

Regards

 

[El OchoCinco]

I am not sure of any benefit of doing an IRON FLY versus a straight call or put fly outright, even on an index....

The best Iron Flys are legged into for different reasons.

I traded a lot of FLYS and Calendars using vol skews or vol spikes. They are really good if you have the time for the research. Iron Flys are not month to month strats as others try to sell in books.

 

[ffs1001]

I am not sure of any benefit of doing an IRON FLY versus a straight call or put fly outright,

Mathematically there are none. Practically there are subtle differences. One being liquidity, spreads/slippage and ease of fill. Eg, if doing a call fly, one of the calls will generally be well ITM (with a wider spread), but if doing the same using an IF, then this long call is replaced by a long put, which is OTM, and can have a tighter spread.

 

[taowave]

There is no real economic benefit in the sense that the markets are so highly liquid and efficient.No one is going to come to you and sell a vertical 10 percent cheap to fair value...

Flys.condors,split strikes are all priced within pennies relative to one another..

And if you do get "edge" in a stock like Tesla,you are likely to give up a portion getting your hedge off..

With that said,each piece of knowledge is an important piece of the puzzle and how you solve it.

Thanks Taowave for a honest response.

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.

All this breaking down of a position into it's individual parts is alluded to on ET quite a lot, but I have yet to find a single post where someone can explain what the trading benefit is for example splitting up an Iron Fly into it's components.

(I'm asking from a position of curiosity and not negativity - I'm not saying there is no benefit, I'm just asking "what is it?")

 

[jamesbp]

Thanks Taowave for a honest response.

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.

All this breaking down of a position into it's individual parts is alluded to on ET quite a lot, but I have yet to find a single post where someone can explain what the trading benefit is for example splitting up an Iron Fly into it's components.

(I'm asking from a position of curiosity and not negativity - I'm not saying there is no benefit, I'm just asking "what is it?")

I often see other people's trades that have been legged into over time where they end up with units at many different strikes in a single expiry ...

One practical use of synthetics / flies / dissection is that a 'complex' position can usually simplified into some sort of combination of Flies / Outrights ... but unless you understand synthetics / flies / dissection the danger is that you may not be able to see the wood for the trees

Given that Fly prices move relatively slowly until near expiry ... the primary risk/reward comes from managing the Outrights as first priority .... managing the Flies as second priority

Hope that helps a little

 

[ffs1001]

Thanks.

I always find things become easier with an actual example. So....say I create a SPX iron fly right now : Expiry is 21-Feb. Strikes are 3200-3250-3300. (Buying 3200 put, selling 3250 straddle, buying 3300 call). I know my theta and vega are roughly 20 and -50 at this moment.
How can one use synthetics to simply this trade?

 

[jamesbp]

How can one use synthetics to simply this trade?

The 3200-3250-3300 Iron Fly is already a relatively straightforward trade.

However, depending on whether you have / change your view on market direction / vols, you could see the position as

#1 short 3250 straddle v long 3200-3300 strangle ... either of which could be traded to modify the position
#2 short 3200-3250 put spread v short 3250-3300 call spread ... either of which could be
traded to modify the position
#3 long 3200-3250-3300 Call Fly ... where you could sell the 3300 call ... to convert into a Call 1x2 spread ( synthetically )
#4 long 3200-3250-3300 Put Fly ... where you could sell the 3200 put ... to convert into a put 1x2 spread ( synthetically )

The possibilities go on and on ...