Pricing Butterfly Spreads

[sle]

ELI5

Had to look that up, actually

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.

You can think of two separate types of flies. One case is where you are (synthetically or outright) trade OTM/2 x ATM/OTM, which is more or less just a bet on where the underlying will end up. You are a net seller of volatility and buyer of wings.

Another case (which we are discussing) is when you trade ATM/2 x OTM/OTM, so the whole fly is actually sitting to one side. You are buying ATM volatility in this case and (mostly) selling the wings.

 

[TheBigShort]

Another case (which we are discussing) is when you trade ATM/2 x OTM/OTM, so the whole fly is actually sitting to one side. You are buying ATM volatility in this case and (mostly) selling the wings.

RUT 121 1300/1500/1700 OCT 19. This is long gamma and theta "the ultimate freebee"LOL. If there was more liquidity in the DOTM puts I could see you implementing this strategy. Would you say the more vega the merrier?

 

[sle]

Would you say the more vega the merrier?

Well, it depends on how comfortable you are with it's ratio to gamma

PS. I just got home and lit up, so not sure I am up for a coherent discussion of anything

 

[TheBigShort]

Well, it depends on how comfortable you are with it's ratio to gamma

PS. I just got home and lit up, so not sure I am up for a coherent discussion of anything

LOL cheers. Have a good night Santa. But tomorrow lets get into calculating the PnL for this trade. Being short vega and long gamma is a little confusing.

 

[marameo]

It the skew index a proxy for when it's best to place a butterfly?

https://it.tradingview.com/symbols/CBOE-SKEW/

 

[samuel11]

You can check the paper below:

https://www.cboe.com/micro/skew/documents/skewwhitepaperjan2011.pdf

Seems like the skew index is based on 30-day implied SPX options, so if you are doing a 6-month butterfly, I would look at more data points.

 

[TheBigShort]

Okay I am trying this long gamma and theta short vega trade out. 231 155/159/167 Put fly on IWM @ 1.41. Expiration Aug 17.
Greeks per 1 Fly
Gamma = 2.1
Theta = 2.2
Vega = -1.1
Delta = -32

I am Long 32 IWM per fly @166.26.

 

[TheBigShort]

Usually my expected PnL is Vega*(IV - RV) BUT i am almost vega neutral. My PnL is baiscally all skew, so I am not to sure what the simple way is to calculate my EV.

 

[samuel11]

Maybe do this calculation for each leg of the fly

 

[DD2018]

Okay I am trying this long gamma and theta short vega trade out. 231 155/159/167 Put fly on IWM @ 1.41. Expiration Aug 17.
Greeks per 1 Fly
Gamma = 2.1
Theta = 2.2
Vega = -1.1
Delta = -32

I am Long 32 IWM per fly @166.26.

Why the 2-3-1 put fly and not the 1-3-2? If you're just targeting to profit from vol skew wouldn't it make more sense to long weight the cheaper side of the skew more?

Also how would you plan to manage the trade on a IWM rally next week?