Butterfly on financials

xandman

xandman

S FAS Feb 86 call
B FAS Feb 91 call
S FAS Feb 96 call


Upcomming events: JPM earnings on Tuesday.

Current conditions: IV 37% SV 13%

My Psuedo-analysis:

FAS looks over extended from a technical perspective. I think we have a large potential for underlying volatility in the next few weeks.

While IV is clearly more expensive, the financial sector is NOT susceptible to a large volatility crunches as can be seen on Ivol's volatility kings master list.
 
Quote from xandman:

S FAS Feb 86 call
B FAS Feb 91 call
S FAS Feb 96 call


Upcomming events: JPM earnings on Tuesday.

Current conditions: IV 37% SV 13%

My Psuedo-analysis:

FAS looks over extended from a technical perspective. I think we have a large potential for underlying volatility in the next few weeks.

While IV is clearly more expensive, the financial sector is NOT susceptible to a large volatility crunches as can be seen on Ivol's volatility kings master list.
More...

So you are buying the body and selling the wings?

There are better ways to buy vol then that fly. You have almost no profit potential with this trade structure.
 
Thanks for the reply, Doobs. That's 2x the body, btw.

I chose the strikes based on an expected downwards resistance of a 50 day moving average.

Isn't a butterfly a bread n butter strategy for buying volatility? What's wrong with the structure?

Please enlighten.
 
Quote from xandman:

Thanks for the reply, Doobs.

I chose the strikes based on an expected downwards resistance of a 50 day moving average.

Isn't a butterfly a bread n butter strategy for buying volatility? What's wrong with the

Please enlighten.
More...

Butterflies are typically bought, not sold. If calls or puts, it's a debit. If it's an iron fly, a credit. In both cases you are selling the body, and buying the wings. This trade is short vol though. If you think FAS price will decline you could do a bearish fly. If you want to be long vega, and short delta, you could trade a calendar (short a near term option, long a further term option). You can do some sort of vertical or 1x2 to be long vol and gamma as well.

It seems like you want to be long financial vol, without being exposed to single stock risk. You could structure a trade that is long/short vol of the basket (FAS), while taking an off-setting position in a constituent (JPM).
 
I sold the wings and got a credit. It seems like a cheap straddle with limited profit, but less decay costs. I am long vol, btw. My pnl graph moves up when I raise volatility.

I kind of waffled on having stock exposure because I am maxed on short delta exposure. However, your calendar example fits my outlook nicely. That's definitely the next strategy I want to master after I learn to apply flys correctly. Unfortunately, outlook/trade structure is a chicken/egg dilemma for me.

As for arbing vol between the index and constituent, while very novel (simple dispersion?) is not within the power of my retail platform to model nor practical from a cost structure for my trade sizes. Though, I can see that I can make that an excel project for my Hoadley add ins.
 
Are the numbers below correct?
  • FAS at $92.11
  • Sell 1 FAS Feb22 86 call at $8.20
  • Buy 2 FAS Feb22 91 calls at $5.15 ($10.30)
  • Sell 1 FAS Feb22 96 call at $2.65
  • Credit $0.55
  • Maximum gain $55.00 if FAS closes above $96.00 or below $86.00 on Feb 22, 2014.
  • Maximum loss $445.00 ($500.00 - $55.00) if FAS closes at $91.00 on Feb 22, 2014.
 
Quote from FXforex:

Are the numbers below correct?


  • FAS at $92.11
  • Sell 1 FAS Feb22 86 call at $8.20
  • Buy 2 FAS Feb22 91 calls at $5.15 ($10.30)
  • Sell 1 FAS Feb22 96 call at $2.65
  • Credit $0.55
  • Maximum gain $55.00 if FAS closes above $96.00 or below $86.00 on Feb 22, 2014.
  • Maximum loss $445.00 ($500.00 - $55.00) if FAS closes at $91.00 on Feb 22, 2014.
More...

Yeah, it makes no sense.

If you sold it at the mid, 0.84, your max gain/loss is $84/$416.
 
1:5 RR for a premium seller? Seems reasonable. I know Iron condors are sold with the same RR.


However, this benefits with a more probable move in the underlying from 91. Can someone show the formula for a probabilistic payoff?
 
Quote from xandman:
01-11-14 07:06 PM

No, the 500 gain accrues to me to, the buyer of the body, if it goes past any of those wings.

( I got .86 cents, btw. But, that does not matter). More importantly, the P/L is upward sloping "V".

So essentially, I got a credit and it can still make more money (4.16). I scratched my head a couple of times when I first started doing this, but I know this happens a lot.

I already banked some profits on a NFLX trade I posted not to recently. The funny? part is: I am making money even with the wrong outlook.
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You do not get the $500.00. Do the math on what those calls are worth when FAS is at:
  • $86.00 or less. Total the results. (at expiry $0.00)
  • $91.00. Total the results. (at expiry $5.00)
  • $96.00 or more. Total the results. (at expiry $0.00)
 
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