how to know the gemma

M

met1989

if i have a butterfly spread that is ITM / ATM and i want to know how much they will be losing on the day of expiration meaning when markets will open up if the spread is at there lowest point of making money how can i calculate how much they will be worth ?

and if im already opening a thread how can i adjust a short butterfly ITM on 1/2 days to expiration ? i checked in books there is no information about this so need to refer me there ;)
 
Stress the position in your execution software. This question cannot be answered.

You’re going to go broke adjusting with a day to exp. just get out.

What software are you using?
 
met1989 said:
if i have a butterfly spread that is ITM / ATM and i want to know how much they will be losing on the day of expiration meaning when markets will open up if the spread is at there lowest point of making money how can i calculate how much they will be worth ?

and if im already opening a thread how can i adjust a short butterfly ITM on 1/2 days to expiration ? i checked in books there is no information about this so need to refer me there ;)
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You need help focusing your question. In the meantime, the suggestion to use your broker's software to stress test is highly reasonable.
 
met1989 said:
i don't think it works good enough there has to be a way to test these things with a pen and paper
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Yeah, start with some binomial trees...

Baby steps. Open risk profile -> toggle the date fwd -> look at the new risk curve.

"The gun is more accurate than I am" is apropos here.
 
I think for what-if scenarios like this, it's best to understand basics and do it with pen & paper. Draw out your profit/loss lines for each position. Then roll it forwards with only intrinsic values remaining to see at it looks like at expiration. You get a more physical "feel" for position. Then simulation tools makes more sense.
 
I solve for a “peak” PnL spot value - underlying price where said fly makes it’s max profit for the day (it’s also delta neutral at that spot). By default it looks 1 day out, which I can step fwd from there. It’s a useful heuristic, as I can slice it as it approaches expiration. Once I have that peak value, I can calc the Theo price/risk to get a dynamic R/R.

It took me awhile to derive a formula. But by rearranging BSM I came up with;
=Spot+(-delta/gamma)
Where spot is set to body strike, and d/g are at T+1 (DTE - 1). Had to recall some high school maths to get there.

IMO it’s easier to look at a distinct value in a cell rather than sliding your cursor along PnL graph in TOS.

So if your fly is 10, and at +1 SD it’s 8. Then at peak it needs to be >=12 to offer +EV.

I run these values, amongst others, for all fly structures (121, 132, 231, 253, 352) of expanding strike width (shoutout riskarb).
I prefer to quantify edge in premium, I don’t really care what the gamma is.

“The edge is in the risk/reward” -B
 
Doobs789 said:
I solve for a “peak” PnL spot value - underlying price where said fly ...
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It's three a.m. in Chicago and you're revealing all your secrets! This thread and the scanner thread at least. I'm gping to have to read all your posts from this evening, see what else you've decided to share tonight.
 
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