Long call/short put butterfly combo

[ferrycorsten]

Natenberg says that a call butterfly and put butterfly with same strikes/expiration (European) should be worth the same amount, and that if they don't, buy the cheap one, and sell the expensive one for a riskless profit.

So I checked out SPX and VIX, in both scenarios the put fly was worth more than the call fly. What am I missing here? If this were true, a long call/short put butterfly combo would be easy money.

 

[FSU]

Quote from ferrycorsten:

Natenberg says that a call butterfly and put butterfly with same strikes/expiration (European) should be worth the same amount, and that if they don't, buy the cheap one, and sell the expensive one for a riskless profit.

So I checked out SPX and VIX, in both scenarios the put fly was worth more than the call fly. What am I missing here? If this were true, a long call/short put butterfly combo would be easy money.

What are using to compare prices? The SPX can have wide quotes, so you may have a problem finding the correct prices to compare.

For the SPX and the VIX, there is no difference in the theoretical price of the butterflies in calls vs. puts of the same strike (if you go far enough out and wide enough, there may be minor differences due to interest rates). There are no arb possibilities for the average trader, with some very rare exceptions.

 

[sle]

You could see a small difference in the mid prices, due to funding. Last trade prices, are, obviously, irrelevant in the options world - you don't know if they were executed off the same reference price.

 

[ferrycorsten]

i see bigger differences using last trade prices and smaller differences using theoretical prices. here is a screenshot using Mar22 options

 

[sle]

I am posting from a cell phone, so I can't check, but are you sure you are using the right forward for your pricing?

 

[ferrycorsten]

Quote from sle:

I am posting from a cell phone, so I can't check, but are you sure you are using the right forward for your pricing?

i just copied these #s into a spreadsheet to show u what i meant. they were taken directly from livevol's last trade price and theoretical value. i haven't done any of my own modeling yet. bid/ask spread is wide, so i guess their theoretical values are open to interpretation. however, i didn't expect to see a .38 difference between the call fly and put fly.

 

[monkeyjoe]

Those spreads are critical. Theoretical values and last prices don't matter if you can't actually execute the arb trade(s) for a net profit.

 

[galvinlee888]

Quote from ferrycorsten:

Natenberg says that a call butterfly and put butterfly with same strikes/expiration (European) should be worth the same amount, and that if they don't, buy the cheap one, and sell the expensive one for a riskless profit.
.

This make my day. I assume you never trade in real account for both configuration, right ?

The commission and slippage will take away this "edge" anytime in real world

 

[Windlesham1]

Never known that to work in the real world as someone else said -slippage and comms will kill the profit-you may get £5 while the broker gets £80!

 

[galvinlee888]

Quote from Windlesham1:

Never known that to work in the real world as someone else said -slippage and comms will kill the profit-you may get £5 while the broker gets £80!

$5 is still not that bad at least you are making some $$ and in long term you will be ok.

The worst is your broker make $80 and you are losing -$5.