Are butterflies worthless?

[Doobs789]

I would like to explain it, but it's way over your head.

 

[marameo]

How about +2 +1 -2 +1 +2?

 

[TradingDemystified]

XYZ stock is 100. A "natural" call fly would be 100/110/120 (+1,-2,+1) say it's a 5.00 debit. Say the same put fly is 4.50. Both of these have three legs. The iron fly is 100/110/110/120 (+1 put, -1 put, -1 call, +1 call) is a 4.75 credit (which is 10-4.75=5.25 debit). All of these are synthetically equivalent. The difference in price is due to micro-structure. I will typically choose the tighter one (smaller bid/ask spread). In general OTM options are tighter than deep ITM. Or if the underlying pays a dividend, you may want to trade the iron (or put fly) to avoid the dividend risk that is inherent with being long an ITM call.

You mean the dividend risk of being SHORT a DITM Call right?

 

[SumZero]

Anyone reminds of a good topic, here in ET, with a deep discussion about flies (debit) vs iron flies (credit) ?

I just know the simplistic approach "go for flies when IV is low and iron flies wen IV is high".

 

[Doobs789]

How about +2 +1 -2 +1 +2?

Is that a Fibonacci sequence? How about posting something useful.

 

[Doobs789]

Anyone reminds of a good topic, here in ET, with a deep discussion about flies (debit) vs iron flies (credit) ?

I just know the simplistic approach "go for flies when IV is low and iron flies wen IV is high".

They are the same. So I'm not sure how that applies.

 

[newwurldmn]

You never heard of Iron Butterflys?

Ina Gada Da Vida Baby!

 

[marameo]

Is that a Fibonacci sequence? How about posting something useful.

 

[tommcginnis]

A butterfly is a bearish spread and a bullish spread (of the same width) that share a (middle) strike.
As the $5-wide 2795/2800 and 2800/2805.

A call butterfly is all calls.
A put butterfly is all puts.
An iron butterfly is puts on bottom, calls on top.
That's it. End of story.

Are they any good?
They are only a trade pattern -- they are not a "thing."
That pattern are a tool -- appropriate in some situations, maybe not-so-appropriate in others.
You can buy them, sell them, buy to initiate, buy to *move*.....
All kinds of uses.

From the profit diagrams available from any search engine via the keywords Options Butterfly Graph Images, you can see that they have greater peak profit than condors of the same neighborhood, but a narrower payout range.

Use the right tool for the right situation.

"It is a poor carpenter who blames his tools."

Don't be a poor carpenter.

 

[TradingDemystified]

Anyone reminds of a good topic, here in ET, with a deep discussion about flies (debit) vs iron flies (credit) ?

I just know the simplistic approach "go for flies when IV is low and iron flies wen IV is high".

This is incorrect right here. Flies and Iron Flies are synthetic equivalents; the only difference is that flies are entered into for a debit and can expand up to max profit while iron flies are entered into for a credit and could potentially expire worthless (short options ATM) giving you max profit.

They are BOTH better strategies to initiate in high IV environments since both of them are short guts (the middle) and long wings

The considerations to choose one over the other are more related to non-transparent factors such as dividends, interest rates, commissions, etc but they are synthetically equivalent