Destriero - Butterfly Trades
- Thread starter ironchef
- Start date
It's all of a sudden so quiet here. Right, we got back to the topic of what the students learnt. I guess they are just a little shy...
lmao! Good one
Just saw this thread, lets get some examples flowing.
I've been trading and studying the fly for a year and a half/two years. IMO, its one of the most efficient structures you can accumulate in your book. Not only is the butterfly an optionality-play, one can use its structure to measure the convexity of the vol surface, and there's even a harmonic pattern called the butterfly.
Here's what we know:
+1/-2/+1 (natural)
+1/-3/+2 call fly
+2/-3/+1 put fly
+2/-5/+3 call fly
+3/-5/+2 put fly
Also the broken-wing'ed (skip-strike) variant of the above spreads (as well as the iron)
Now for the 132/231 this refers to leg size, the only difference is call/put.
To quote Desty, "put and call flies (132 put and call flies) are equivalent. I typically go with a 2/1 ITM to body strike-width natural due to microstructure, but they are equivalent.".
So when we develop a heuristic method for spotting anomalies within the vol-space, you can utilize that opportunity via a fly spread. The variant is chosen based off the opportunity presenting itself (usually vol-skew). The vertical skew will show some higher juiced OTM premo, thus the 132/231 come into play.
I've been trading and studying the fly for a year and a half/two years. IMO, its one of the most efficient structures you can accumulate in your book. Not only is the butterfly an optionality-play, one can use its structure to measure the convexity of the vol surface, and there's even a harmonic pattern called the butterfly.
Here's what we know:
+1/-2/+1 (natural)
+1/-3/+2 call fly
+2/-3/+1 put fly
+2/-5/+3 call fly
+3/-5/+2 put fly
Also the broken-wing'ed (skip-strike) variant of the above spreads (as well as the iron)
Now for the 132/231 this refers to leg size, the only difference is call/put.
To quote Desty, "put and call flies (132 put and call flies) are equivalent. I typically go with a 2/1 ITM to body strike-width natural due to microstructure, but they are equivalent.".
So when we develop a heuristic method for spotting anomalies within the vol-space, you can utilize that opportunity via a fly spread. The variant is chosen based off the opportunity presenting itself (usually vol-skew). The vertical skew will show some higher juiced OTM premo, thus the 132/231 come into play.
right,
The higher the implied vol, the cheaper the fly will be. the cheapest fly is the best fly.
Cheaper butterflies have the lowest dollar risk and widest B/E range (R/R).
Wow, that's probably the first black-and-white thing I've seen WRT flys.
Everything else is about percentages and possibilities. Makes sense, though - thanks!Is there a situation in which an IF would be preferable to a single-side fly? I realize they're synthetically equivalent, but it seems like an ATM put fly is always more expensive than the iron due to wider ITM spreads. Also, given div risk, is there ever a reason to go with a call-side fly?
I can calculate stuff all day long, but I'm really struggling to get this thing that Taleb called "techne" (something like "craft") vs. "episteme" ("book learning".) These days, I'm seriously envious of the old floor traders who got that stuff by the boatload, and what little of it I've been exposed to has never failed to kick my trading up a notch. Shortcuts like pricing a straddle to get the expected move, or just looking N strikes/expirations up/down from the current one to roughly price a spot move/time change... that kind of thing knocks my socks off.
As an ex floor trader and derivative desk "guy",I can assure you that you will get that "6 th sense" that market makers develop if you stick with it ...you are way ahead of the curve
I do not make a big deal out of 1x3x2 vs 2x3x1 or any equivalent structure.What I do rely on is my ability to look at a screen and immediately pick up whether one strike/option is out of wack relative to the others..Your point was spot on,with the caveat we have to assume sticky strike vs sticky delta..
"or just looking N strikes/expirations up/down from the current one to roughly price a spot move/time change."
My only other "guess" is for these similar stuctures,you could price and/or compare them vs a flat skew,and compare the "Alpha" relationship,which I never do"_
I do not make a big deal out of 1x3x2 vs 2x3x1 or any equivalent structure.What I do rely on is my ability to look at a screen and immediately pick up whether one strike/option is out of wack relative to the others..Your point was spot on,with the caveat we have to assume sticky strike vs sticky delta..
"or just looking N strikes/expirations up/down from the current one to roughly price a spot move/time change."
My only other "guess" is for these similar stuctures,you could price and/or compare them vs a flat skew,and compare the "Alpha" relationship,which I never do"_
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I can't even tell you how encouraging that is.
Thank you! I'm pouring my heart into it.I suspect I'm going to have to stare at a lot more options chains to get there. But I will.
Yeah, I pretty much took that as implying a relatively flat skew/minimal price movement (depending on which way you're pricing); it's just a rough projection for where a simple option or a calendar is likely to end up. A big jump in IV/change in price would screw all that up instantly.