Do bullish butterflies always need to be out-of-the-money?

T

trendisyourfriend

Hi all, when I learned about bullish butterflies, I learned that the spread should be OTM. It allows you to take a cheap position without risking too much capital. Is there ever a situation where it makes sense to initiate the bullish butterfly spread where the long call at the lower-strike price is ITM?

Thanks
 
Listen to GOT ...

Butterflys are simply one long vertical lumped in with one short vertical,,They share the same strike..

You can brew your own fly based off your market call and select the verts that make the most sense to you..

Thats the very simple breakdown...

If you like punting,yes you can buy cheap Flys,but as you know,the probability of hitting is low


trendisyourfriend said:
Hi all, when I learned about bullish butterflies, I learned that the spread should be OTM. It allows you to take a cheap position without risking too much capital. Is there ever a situation where it makes sense to initiate the bullish butterfly spread where the long call at the lower-strike price is ITM?

Thanks
More...
 
taowave said:
Listen to GOT ...

Butterflys are simply one long vertical lumped in with one short vertical,,They share the same strike..

You can brew your own fly based off your market call and select the verts that make the most sense to you..

Thats the very simple breakdown...

If you like punting,yes you can buy cheap Flys,but as you know,the probability of hitting is low
More...

Thanks for the input taowave. Is there any advantage to trading a bullish butterfly over a bull call spread?
 
Its cheaper.... But if the stock overshoots your target on the upside,the B-FLY gets short delta and goes to ZERO if the stock closes above your long wing on the upside...

Think about it..A Bfly is a LONG and Short vertical,same short strike..Stock closes at your short strike on expiry,you are genius.Long Vert maxes out,short vert goes to zero.

Stock close above that,you may be kicking yourself for being short the upper vertical as the higher it goes(more right you are),the more the likelyhood of losing your debit

You need to evaluate if the money saved on the Bfly vs the vert is worth possibly being right on initial direction/delta but losing money if you are "too right"..
 
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TYF,heres a quick "test"..

Stock is at 100...You are bullish...30 day, 100-110 vertical trades for 1.75..

100-110-120 Bfly trades for 1...

Which do you choose and why?







trendisyourfriend said:
Thanks for the input taowave. Is there any advantage to trading a bullish butterfly over a bull call spread?
More...
 
trendisyourfriend said:
Is there any advantage to trading a bullish butterfly over a bull call spread?
More...
In addition to what taowave said, I think a bullish butterfly can be constructed to have positive theta at inception with a better profit-to-risk ratio than that of a bull call spread. Therefore, you can afford to wait longer for the expected underlying move to happen. However, because the underlying range for the max profit is narrow, the position should be monitored closely when the move happens, and a large underlying gap up can go against you.
 
taowave said:
Listen to GOT ...

Butterflys are simply one long vertical lumped in with one short vertical,,They share the same strike..

You can brew your own fly based off your market call and select the verts that make the most sense to you..

Thats the very simple breakdown...

If you like punting,yes you can buy cheap Flys,but as you know,the probability of hitting is low
More...
I’ll add that I typically try these trades with only a couple days or less on the series. If you feel as right as you should, the difference in multiple can be worth it
 
deltaf0rce said:
I’ll add that I typically try these trades with only a couple days or less on the series. If you feel as right as you should, the difference in multiple can be worth it
More...

I'm not suggesting the OP should do what I do, but I typically open a mixture of ItM and OtM flies with c.3DTE. It works for me.
 
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