Correct, it's a backspread. When I said it was a backspread I was merely trying to designate it as being long gamma.
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Long Iron Butterfly, Long Iron Condor, Wrangles and their Synthetics: Risk, Reward, G
- Thread starter CPTrader
- Start date
Correct, it's a backspread. When I said it was a backspread I was merely trying to designate it as being long gamma.
Quote from CPTrader:
Alright now I am getting confused.
so many different notations and conventions...
What is this: long strangle at the wings, short body strangle - LONG OR SHORT IRON CONDOR
What is this: short strangle at the wings, long body strangle - LONG OR SHORT IRON CONDOR.
Where do you receive a credit - Long or Short Iron condor.
I have seen both referred to as long or short by different traders, authors...is there no convention?
If you receive a credit you are short the spread, if you pay a debit you are long the spread. If you sell the body and buy the wings, you are short and you will have a credit and vice versa. Hope this makes sense.
Quote from Maverick74:
If you receive a credit you are short the spread, if you pay a debit you are long the spread. If you sell the body and buy the wings, you are short and you will have a credit and vice versa. Hope this makes sense.
Thanks for confirming what I thought...all the semantics can get a little crazy. Many thanks.
I'll ask you a few questions, if I may, that I previously asked: how would you compare a short iron condor to a long wrangle in terms of risks/reward - given that the trader was expecting the market to be rangebound.
Are there any special risks if you enter a short iron condor or long wrnagle and exit before expiration and/or construct the short iron condor or wrangle with deep out of the money puts/calls?
Thanks in advance.
Quote from CPTrader:
Thanks for confirming what I thought...all the semantics can get a little crazy. Many thanks.
I'll ask you a few questions, if I may, that I previously asked: how would you compare a short iron condor to a long wrangle in terms of risks/reward - given that the trader was expecting the market to be rangebound.
Are there any special risks if you enter a short iron condor or long wrangle and exit before expiration and/or construct the short iron condor or wrangle with deep out of the money puts/calls?
Thanks in advance.
Well with the condor your strikes are spread apart more then with the wrangle. Typically a wrangle involves selling the ATM call/put and buying the wings. So the profit range will be a lot more narrow but will produce a larger credit. The condor will have a larger profit range but the profit will be smaller.
Anytime you put on a spread where you are trying to earn premium, it hardly ever pays to exit early since the most gamma exists as you near expiration. The opposite is true when you are long premium, it's more beneficial to exit early and not wait till you near expiration.
I think something that might help you understand this all better is to remember the relationship that delta, gamma, theta and vega have to time and to price. This makes things so much easier. Your gamma, theta and vega is centered at the strike. The more ITM or OTM you go, the less gamma, theta and vega you will have. The further you go out in time, the more vega, the less gamma and theta. Deltas become very sensitive to time as your near expiration. Increases in vol adds deltas and decreases in vol subtract deltas. Options that are ITM will have deltas moving toward 100 as time passes and options OTM will have deltas move toward 0 as time passes. If you study this over and over you will have a very complete understanding of every spread. I hope this cheat sheet helps.
Quote from Maverick74:
Well with the condor your strikes are spread apart more then with the wrangle. Typically a wrangle involves selling the ATM call/put and buying the wings. So the profit range will be a lot more narrow but will produce a larger credit. The condor will have a larger profit range but the profit will be smaller.
Anytime you put on a spread where you are trying to earn premium, it hardly ever pays to exit early since the most gamma exists as you near expiration. The opposite is true when you are long premium, it's more beneficial to exit early and not wait till you near expiration.
I think something that might help you understand this all better is to remember the relationship that delta, gamma, theta and vega have to time and to price. This makes things so much easier. Your gamma, theta and vega is centered at the strike. The more ITM or OTM you go, the less gamma, theta and vega you will have. The further you go out in time, the more vega, the less gamma and theta. Deltas become very sensitive to time as your near expiration. Increases in vol adds deltas and decreases in vol subtract deltas. Options that are ITM will have deltas moving toward 100 as time passes and options OTM will have deltas move toward 0 as time passes. If you study this over and over you will have a very complete understanding of every spread. I hope this cheat sheet helps.
Many thanks!
Was away for the weekend; just joining this thread(if I may). Long wrangle; a combo-backspread; will involve less risk than a single call(put) backspread if completed for a credit on both call and put spreads.
It's a good alternative to a long straddle; your gamma is symmetrical, unlike a single call(put) wrangle.
Personally, I prefer the short fly(long gamma) to the wrangle or backspread as the vega risk is nonexistent. You gain from vol-compression and stat-vol as well(gamma-effects). Caveat, your P&L is capped on the short fly/condor.
OT: looks like I missed some fun with "highfreq"
It's a good alternative to a long straddle; your gamma is symmetrical, unlike a single call(put) wrangle.
Personally, I prefer the short fly(long gamma) to the wrangle or backspread as the vega risk is nonexistent. You gain from vol-compression and stat-vol as well(gamma-effects). Caveat, your P&L is capped on the short fly/condor.
OT: looks like I missed some fun with "highfreq"
Quote from Maverick74:
I think something that might help you understand this all better is to remember the relationship that delta, gamma, theta and vega have to time and to price. This makes things so much easier. Your gamma, theta and vega is centered at the strike. The more ITM or OTM you go, the less gamma, theta and vega you will have. The further you go out in time, the more vega, the less gamma and theta. Deltas become very sensitive to time as your near expiration. Increases in vol adds deltas and decreases in vol subtract deltas. Options that are ITM will have deltas moving toward 100 as time passes and options OTM will have deltas move toward 0 as time passes. If you study this over and over you will have a very complete understanding of every spread. I hope this cheat sheet helps.
It's nice to diagram the gamma-frown and label the tails as "itm" and "otm" with the center of the distribution labeled as the "atm" strike.
Watch the area above the curve expand/contract with changes in gamma, it will become very intuitive.
I've produced a 3D gamma chart, but have a non-disclose with some clients... but it's easy to produce. Remember that as the gamma-curve goes leptokurtic; the area above the peak of the curve decreases.
if you are long the wings you are long the butterfly
if you are short the wings you are short the butterfly...
think about it ...
long put spread is equal to short call spread on same strikes.
long butterfly
580 call L1
585 call S2
590 call L1....for a debit
long iron butterfly
580 put L1
585 call S1
585 put S1
590 call L1.... for a credit
long 580/585 call spread = short 580/585 put spread p&l is the same as call spread
figure expiration at 584 and figure out value...
value is = to 4 on call fly and 1 on iron
4+1 = 5 your strike spread
long wings = long characteristics = short vol
short wings = short characteristics = long vol
if you are short the wings you are short the butterfly...
think about it ...
long put spread is equal to short call spread on same strikes.
long butterfly
580 call L1
585 call S2
590 call L1....for a debit
long iron butterfly
580 put L1
585 call S1
585 put S1
590 call L1.... for a credit
long 580/585 call spread = short 580/585 put spread p&l is the same as call spread
figure expiration at 584 and figure out value...
value is = to 4 on call fly and 1 on iron
4+1 = 5 your strike spread
long wings = long characteristics = short vol
short wings = short characteristics = long vol
Let's say you came in on May 1 and expected the SPX OR ESM4 to trade between 1025 and 1145 for the month of May. Esm4 opend on may 1 around 1106.
You want to create a position that will profit if your market view of this range is right, while being as much as possible delta and vol neutral. You also want to be out of the position some time during May or by the end of the month at the latest. The position should also be a "limited risk position". What would be the ideal position?
You want to create a position that will profit if your market view of this range is right, while being as much as possible delta and vol neutral. You also want to be out of the position some time during May or by the end of the month at the latest. The position should also be a "limited risk position". What would be the ideal position?