ATM Iron Butterfly - Why is it Delta Negative?

[ValZ2020]

FYI: (prior topic reference) Previously I posted about why the ATM Iron Fly had negative delta. Here is a plot of IV curves (smiles) for SPX from 14 - 90 Days to Expiration for reference. The red circled region is where most trading occurs. The heavy black horizontal dots are ATM. Note: in all cases the lowpoint of the IV smile is far to the right. A picture is often helpful to understand some topics.
View attachment 225507

So that means that the long put will have a much higher IV than the long call that is equidistant from the ATM and will obviously be more expensive, but does that always mean a much bigger delta? I just checked on a number of highly liquid stocks today that seem to be trading options with an IVol that is in the higher 52 week percentile, and the difference in the deltas between equidistant calls and puts doesn't seem to be all that big...

 

[Atikon]

FYI: (prior topic reference) Previously I posted about why the ATM Iron Fly had negative delta. Here is a plot of IV curves (smiles) for SPX from 14 - 90 Days to Expiration for reference. The red circled region is where most trading occurs. The heavy black horizontal dots are ATM. Note: in all cases the lowpoint of the IV smile is far to the right. A picture is often helpful to understand some topics.
View attachment 225507

Guys another thing that I'm trying to understand from that same chapter is the concept of tightening the wings to secure the profit of the ATM Iron Butterfly, once it's there (pages 103-104).
They say it's a good adjustment technique at ~10% profit. If I get this right, by doing this you will have spent all the profit from the depreciation of the short "thorax" on more expensive longs than what you had before (tightening the long strangle). So effectively at that point you'll be left with zero profit?

And then, my understanding was that if the underlying moves sharp in either direction - the idea is that the appreciation of the "winning" long wing will be bigger then the depreciation of the losing wing due to its then-higher delta (so gamma will play to your advantage by accelerating the delta of the "winning" wing and decelerating the loss of the losing?). And then the theta will continue to take care of the short "thorax" which is now OTM?

And if the underlying remains flat - then the theta of the ATM shorts will work faster than that of the OTM longs and I win anyway?

Did I get this right and if not what have I missed?

Thanks a lot guys!

So IV concentrates even more the closer the Optionchain comes to expiration, thats why you can adjust to take profits at 10% (look at the wings getting closer and closer, the less time you have, the shorter time for the volatility to swing to the OTM price, you move down to get to the steepest point IV Rank Delta/Strike Delta if I'm seeing interpreting this correctly. @stepandfetchit might help me out with this one. Step what program do you use to do these diagramms?

 

[stepandfetchit]

It may be easier to observe if you just look at the Delta of some Verticals: Note the difference in the absolute value of the Call Verticals VS the PUT Verticals. The difference is small, but persists for the strikes you will have in your Iron Fly. My plot was intended to help illustrate why they are different, but is not apparent unless you drill into the detail. If the Iron Flys were placed to the right of that hand-drawn blue line, the initial delta should be positive instead of negative, however the underlying price in that region is not very enticing! The initial Delta should be near zero if place close to that blue line intersection of the terms. Again, the Delta difference is small. I think you (or someone) posted an example with the delta beginning at -28 or so. (I used your numbers and arrived at -8.4 for that case, but am reading between the lines as I do not have access to your document. Here is a sample of where I tried to reconstruct what I thought was stated (or intended):

 

[Atikon]

It may be easier to observe if you just look at the Delta of some Verticals: Note the difference in the absolute value of the Call Verticals VS the PUT Verticals. The difference is small, but persists for the strikes you will have in your Iron Fly. My plot was intended to help illustrate why they are different, but is not apparent unless you drill into the detail. If the Iron Flys were placed to the right of that hand-drawn blue line, the initial delta should be positive instead of negative, however the underlying price in that region is not very enticing! The initial Delta should be near zero if place close to that blue line intersection of the terms. Again, the Delta difference is small. I think you (or someone) posted an example with the delta beginning at -28 or so. (I used your numbers and arrived at -8.4 for that case, but am reading between the lines as I do not have access to your document. Here is a sample of where I tried to reconstruct what I thought was stated (or intended):

View attachment 225548

yeah that was me, I meant his second question. Adjusting the Long Strangles at 10% profit/move them down. 4 comments up/linked in my last comment. What program do you use to illustrate the IV?

 

[stepandfetchit]

So IV concentrates even more the closer the Optionchain comes to expiration, thats why you can adjust to take profits at 10%, you move down to get to the steepest point IV Rank Delta/Strike Delta if I'm seeing interpreting this correctly. @stepandfetchit might help me out with this one. Step what program do you use to do these diagramms?

Atikon: program is Perl code I wrote, which drives gnuplot (a free tool) for the ploting. If you have gnuplot installed, I can provide the plots if you like. Allows you to rotate the 3-D view, which can be nice.

 

[ValZ2020]

It may be easier to observe if you just look at the Delta of some Verticals: Note the difference in the absolute value of the Call Verticals VS the PUT Verticals. The difference is small, but persists for the strikes you will have in your Iron Fly. My plot was intended to help illustrate why they are different, but is not apparent unless you drill into the detail. If the Iron Flys were placed to the right of that hand-drawn blue line, the initial delta should be positive instead of negative, however the underlying price in that region is not very enticing! The initial Delta should be near zero if place close to that blue line intersection of the terms. Again, the Delta difference is small. I think you (or someone) posted an example with the delta beginning at -28 or so. (I used your numbers and arrived at -8.4 for that case, but am reading between the lines as I do not have access to your document. Here is a sample of where I tried to reconstruct what I thought was stated (or intended):

View attachment 225548

that's right, that's what Chen and Sebastian put down in that book on pages 106 and 107 as examples (except it was the ATM call that was 49.3 and the ATM put was -50.6 not vice versa, so the actual delta equates to -5.8) and then they say "with a delta of -28 you buy a call to flatten the delta" right underneath which kinda baffled me. Maybe just a typo, like someone here suggested...

 

[ValZ2020]

So IV concentrates even more the closer the Optionchain comes to expiration, thats why you can adjust to take profits at 10% (look at the wings getting closer and closer, the less time you have, the shorter time for the volatility to swing to the OTM price, you move down to get to the steepest point IV Rank Delta/Strike Delta if I'm seeing interpreting this correctly. @stepandfetchit might help me out with this one. Step what program do you use to do these diagramms?

But wouldn't that mean that your wider strike longs (your original long strangle) will also go down in price by a lot, so sell to close them would generate less than what you need to buy to open the narrower wings, so it'll be a net debit transaction eating up your profit from the time decay of the "thorax"? Or you mean you buy the narrower wings, spending less on the net debit then the profit you got from the decayed thorax?

 

[taowave]

I think you are sort of missing the bigger picture.You bought the fly,it went your way and the wings most likely got hammered.

At this point,you should look at the verticals you are theoretically short(rolling the wings closer to ATM)..do you want to be short verticals trading at pennies???

I dont stay short 20 point verticals for 15 cents...