Pricing Butterfly Spreads

[sle]

Yeah, agreed.

Being able to play the short-dated distribution (i.e. pegging delta buckets with short-dated flys) like that takes a pretty good market call. Cudos to you if you can play in that sand box

 

[oldmonk]

Delta accounts for half, stickiness for half. I priced it QnD using the resulting deltas, so delta/local vol.

Can you explain what "stickiness" and "QnD" mean?

 

[destriero]

Being able to play the short-dated distribution (i.e. pegging delta buckets with short-dated flys) like that takes a pretty good market call. Cudos to you if you can play in that sand box

I don't trade anything outside of 30D unless it's an event (2016 election).

 

[destriero]

Can you explain what "stickiness" and "QnD" mean?

Stickiness = Derman delta.
QnD = Quick n' Dirty

 

[oldmonk]

Stickiness = Derman delta.
QnD = Quick n' Dirty

Thanks, I've just started reading Derman's Vol Smile book. Going through the last few posts, it's clear that I have a lot to learn on this subject.

 

[sle]

I don't trade anything outside of 30D unless it's an event (2016 election).

Really, dude, you had to bring it up? :/

 

[TheBigShort]

I have a few questions here about this long gamma long theta butterfly and about trading skew in butterflies in general. Below we can see that Russel is in the 84th percentile for the 3 month skew 90% 110%.

You guys like to buy butterflys into skew for the long gamma long theta. Here is the 121 Put Iron butterfly for the Russel 3 month ATM 90%110%.

It seems we still have a bit of negative gamma. Also What is the reason to buy a Fly when the skew is really steep like it is here (10%)?

 

[El OchoCinco]

Thanks, I've just started reading Derman's Vol Smile book. Going through the last few posts, it's clear that I have a lot to learn on this subject.

If you could get through Derman and Sheldon Natenberg then Dest will sound like kindergarten talk

 

[sle]

It seems we still have a bit of negative gamma. Also What is the reason to buy a Fly when the skew is really steep like it is here (10%)?

You might need to move the strikes farther apart, it's an iterative process and it does not always line up (sometimes the convexity is too high and the far +1 leg carries poorly).

 

[oldmonk]

You might need to move the strikes farther apart, it's an iterative process and it does not always line up (sometimes the convexity is too high and the far +1 leg carries poorly).

I'm hesitant to ask any more ELI5 questions on this, but could you explain why you'd want to buy a fly when skew is steep? I was under the impression that a steep skew is bad for wingspreads in general, since you're paying a relatively higher premium for the wings.