2020: Butterfly Spread Thread

[.sigma]

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?

Thanks for the comment.

Well I do look at the vol statistics of the underlying at hand. I do measure IVR, IV, IV%tile, HV, ATR, BBWidth, and learning the ACD method now.

But as far as trading term structure (calendars/diagonals) and even vol-strips I haven't done. Or like you said, maybe just unaware.

But slick dudes like sle, Dest, TBS have these sophisticated models that model vol "better" than platforms like TOS, IB, tastyworks?

Idk really, I don't dwell on it much. Just learn as much as I can daily, and apply that to my account. I'm focused on my P/L, and all the statistics hovering around those Profit and Loss numbers.

 

[El OchoCinco]

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.

Yeah there are times I short the straddle and after vols come in or some decay I slap on the wings for a credit FLY and let it run a bit more to see if I can increase the profit. I do not start out planning to FLY off my short straddle when I have done them but they become an adjustment "option"

 

[El OchoCinco]

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!

Start small......IV is often equivalent to time in a way. When IV decreases a FLY value goes up, just like when time passes a FLY value goes up assuming underlying is not making a huge move.

So to buy a FLY you would like IV to be relatively high so you pay relatively less for the FLY. If IV comes down the FLY will increase in value even if little time passes. One can look at months were IV is inflated due to skews or earning announcement and use FLY as event trades like for calendars.

 

[taowave]

We talked about this before.

What you are stating is true for ATM flys and their neighbors

Its not true for OTM flys..The relationship starts to invert

Far OTM Flys are long vega..

Think abut it..If you are long an ATM fly you would love for the stock to do absolutely nothing and sit there like a lump..

If you are long a far OTM fly,you need high vol for the stock to have any chance of getting to your long strikes..

Start small......IV is often equivalent to time in a way. When IV decreases a FLY value goes up, just like when time passes a FLY value goes up assuming underlying is not making a huge move.

So to buy a FLY you would like IV to be relatively high so you pay relatively less for the FLY. If IV comes down the FLY will increase in value even if little time passes. One can look at months were IV is inflated due to skews or earning announcement and use FLY as event trades like for calendars.

 

[El OchoCinco]

We talked about this before.

What you are stating is true for ATM flys and their neighbors

Its not true for OTM flys..The relationship starts to invert

Far OTM Flys are long vega..

Think abut it..If you are long an ATM fly you would love for the stock to do absolutely nothing and sit there like a lump..

If you are long a far OTM fly,you need high vol for the stock to have any chance of getting to your long strikes..

We may have talked about this before and if so you are still saying incorrect things.

How so? An OTM Call Fly does not need high IV, it just needs the stock to move higher and IV could be actually falling while the stock moves higher and your FLY will increase in value.

OTM FLY now add delta to the equation and can be looked at as purely directional if you want.

It just takes one example to prove you wrong. An OTM FLY is mostly a directional bet and IV becomes more important if the body moves closer ATM, but you could put on an OTM Call Fly and IV could drop as the stock moves higher thus disproving your statement.

 

[ironchef]

If you are long a far OTM fly,you need high vol for the stock to have any chance of getting to your long strikes..

A stock that is trending may not have high IV and may not need high IV to move there?

 

[taowave]

OC,you are scrambling
You keep on bringing up IV and Flys and are off on your assumption
Not all Flys go up when IV decreases.
If you buy an far OTM fly,it will be cheaper if IV is lower.

Doesnt make sense to add direction/delta to the equation to support your IV argument.
Are you also saying that an ATM fly is not a directional bet?
Why not look at all BFLY's deltahedged(flat) and isolate the IV component?

I do agree that some Flys are way more sensitive to vol than others,but that doesnt make your statement accurate.

Im not making it up.Just look at an option calculator.Plug and play

 

[taowave]

Thats a good catch. What you are saying is a stock can have a very low realized vol,i.e.moving/trending the same percent per day and certainly get to the long strike of an OTM call...

I should have been more clear and related it to IV/perception of a possible large move.I didnt want to get into realized vol vs implied,but you are dead right.

The main point is,from an option model valuation,an OTM fly will need an increase in IVol to have it priced higher.As you increase the IV, OTM options Deltas will head north,increasing the probability of finishing ITM or being touched..

A stock that is trending may not have high IV and may not need high IV to move there?

 

[ironchef]

Start small......IV is often equivalent to time in a way. When IV decreases a FLY value goes up, just like when time passes a FLY value goes up assuming underlying is not making a huge move.

So to buy a FLY you would like IV to be relatively high so you pay relatively less for the FLY. If IV comes down the FLY will increase in value even if little time passes. One can look at months were IV is inflated due to skews or earning announcement and use FLY as event trades like for calendars.

Thanks. It is beginning to make some sense.

For earning play, IV is inflated so fly is cheap but after earning, after IV is deflated the underlying likely would have moved way off and the fly would not be profitable. A correct directional bet is still necessary?

 

[ironchef]

@taowave and @El OchoCinco

Are butterflies usually short duration trades? From what I read, des' butterflies are all a few days or at most a couple of weeks durations.