Which trade is better

[Engine99]

Can someone please explain to me how volatility may help or be counter productive to strangles and butterfly trades?

Trade 1:
Stock X trading around 50
Butterfly trade Max Gain @ 50 = 200$
Max Loss = 100$
Implied Vol / Historical Vol = 1/1

Trade 2:
Stock X trading around 50
Butterfly trade Max Gain @ 50 = 300$
Max Loss = 100$
Implied Vol / Historical Vol = 4/1

Thanks for some help understanding this.

 

[nazzdack]

Quote from Engine99:

Can someone please explain to me how volatility may help or be counter productive to strangles and butterfly trades?

Trade 1:
Stock X trading around 50
Butterfly trade Max Gain @ 50 = 200$
Max Loss = 100$
Implied Vol / Historical Vol = 1/1

Trade 2:
Stock X trading around 50
Butterfly trade Max Gain @ 50 = 300$
Max Loss = 100$
Implied Vol / Historical Vol = 4/1

Thanks for some help understanding this.

?..........The maximum gain occurs at $50?.......I'm assuming you're "long the wings". If so, increased volatility is bad because that means the market is more likely to move away from $50. Trade-1 has the more "stable" volatility ratio. You're more likely to get the $200 maximum gain. Trade-2 has the "unstable" ratio. You're less likely to get the $300 maximum gain. You might be better off "shorting the wings" and settling for a $100 gain with greater movement of the underlying instead.