By dissecting the position into components with different sensitivities to say Delta / Vega
By prioritising risk / opportunity if you have or change your view on market direction / vols
2020: Butterfly Spread Thread
- Thread starter .sigma
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By dissecting the position into components with different sensitivities to say Delta / Vega
By prioritising risk / opportunity if you have or change your view on market direction / vols
Another example ... say you are short a 3200-3300 Guts strangle ... short 3200c - short 3300p
Guts strangle trading for 105
You have a policy of not holding short strangles when premium less than 10
Do you hold or close the strangle / why ?
Jamesbp, I have a question for you - where is the synthetic in all of the theoretical positions you mentioned?
3200c - 3200p Guts strangle synthetically equivalent to 3200p - 3200c strangle
3200c - 3200p Guts strangle trading for 105
What should 3200p - 3200c strangle be trading for ?
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
You keep confusing everything I am saying.
You made a simple statement that an OTM FLY needs IV to go up.
I showed you an example where that is not true.
An OTM Call FLY will earn if the underlying moves higher and time passes and IV stays the same or even goes down a little. if I can show one example where a statement is wrong than it is not necessarily true.
I'm not making it up, just look at an option tool.
Holy #$%&,you are difficult
All I am saying is your statement isnt 100 percent accurate
"When IV decreases a FLY value goes up"
You didnt specify,but if I read between the lines you were referring to ATM flys,and you are spot on..
For guys starting,they should run an option simulator and come up with their own conclusions.
Check varying percent of spot Butterffy's and the effect of changing the Implied Vol.
And your example has nothing to do with what we are discussing
You are throwing an 0-2 curveball by introducing path dependency/ asset moving in the same direction as delta.Yeah,as long as an adverse move in vega doesnt offset a favorable move in Delta,if you are delta long and the stock goes higher,you will make money.
Cmon bro
All I am saying is your statement isnt 100 percent accurate
"When IV decreases a FLY value goes up"
You didnt specify,but if I read between the lines you were referring to ATM flys,and you are spot on..
For guys starting,they should run an option simulator and come up with their own conclusions.
Check varying percent of spot Butterffy's and the effect of changing the Implied Vol.
And your example has nothing to do with what we are discussing
You are throwing an 0-2 curveball by introducing path dependency/ asset moving in the same direction as delta.Yeah,as long as an adverse move in vega doesnt offset a favorable move in Delta,if you are delta long and the stock goes higher,you will make money.
Cmon bro
Also "an OTM fly will need an increase in IVol to have it priced higher"
I was responding back to your comment quoted above.
A stock can slowly move higher over two or three weeks with steady or even decreasing vol and that FLY will increase in value based on theta/delta. That contradicts the statement that an OTM FLY needs an increase in IV to have it price higher.
You keep saying I am difficult but you said something I can easily disprove so it is not correct. An OTM FLY can make money if the underlying moves to the body and settles in the profit zone before expiration. changes in IV can affect the value of the FLY but increase in IV is not mandatory for profitability there.
That is pretty straightforward I think, not sure where the confusion keeps coming in.
I could see where the confusion comes in,and replied to I Chef..I did not want to get into realized vol and path dependency.
Your initial statement was 100% addressing IV and how it relates to theoretical pricing.You are now introducing variables that are not related to pricing of spreads/flys.
If you are sitting on a derivatives desk(which I did for many years),and a seller comes in looking to sell 10,000 spreads/FLYS you get your "edge" by adjusting vol in your favor,and coming up with a price that you feel somewhat comfortable with.
Rarely if ever will a derivative trader factor in where he/she thinks the stock is going and at what rate it moves.Of course you can punt on an OTM fly and not delta hedge,and if the stock moves slooowly to your sweet spot you will make money. Again that has nothing to do with IV's effect on pricing..
All that shows is that it is better to be lucky than good
Your initial statement was 100% addressing IV and how it relates to theoretical pricing.You are now introducing variables that are not related to pricing of spreads/flys.
If you are sitting on a derivatives desk(which I did for many years),and a seller comes in looking to sell 10,000 spreads/FLYS you get your "edge" by adjusting vol in your favor,and coming up with a price that you feel somewhat comfortable with.
Rarely if ever will a derivative trader factor in where he/she thinks the stock is going and at what rate it moves.Of course you can punt on an OTM fly and not delta hedge,and if the stock moves slooowly to your sweet spot you will make money. Again that has nothing to do with IV's effect on pricing..
All that shows is that it is better to be lucky than good
Taking this post from @Doobs789 journal, if you havent checked it out yet, its filled with good info about bflyz.
"For some reason I thought 132 call and 231 put fly's only referred to call/put fly's and not the iron. Didn't know you could also trade this set up with iron fly's." - sig
"I made simple table to show you equivalents. These are the quantities long/short for each leg. Notice for 253/352 it's 1.5 for irons, this is to reduce to 1-lot so you can compare to other structures. But you can't trade 0.5 a contract, so you must trade 2-lot minimum. Second table shows conversion." - Doobs
Inserted below is the table Doobs created. Nice visual!
"For some reason I thought 132 call and 231 put fly's only referred to call/put fly's and not the iron. Didn't know you could also trade this set up with iron fly's." - sig
"I made simple table to show you equivalents. These are the quantities long/short for each leg. Notice for 253/352 it's 1.5 for irons, this is to reduce to 1-lot so you can compare to other structures. But you can't trade 0.5 a contract, so you must trade 2-lot minimum. Second table shows conversion." - Doobs
Inserted below is the table Doobs created. Nice visual!
Attachments
Equally useful would be to dissect into Flies / Spreads
+2 x -5 x +3 ... whether iron or naturals can be seen as
+2 x -4 x +2 Fly
-1 x +1 Vertical
Then you can prioritise trade management