midway on Nostr: Ok, let me lay out what this butterfly spread actually is. In this particular trade ...
Ok, let me lay out what this butterfly spread actually is.
In this particular trade there are no calls involved. It’s all in the puts. I sold 2 puts near the money, at the time 5900. I then in the same transaction bought 1 put 100 points down from the shorts @ 5800 and one put 90 points up @ 5990. All in the Jan 17 expiration which was 29 days out at the time I opened the trade.
This produces a “tent” which describes the range under which the trade is profitable at expiration. The dark blue lines of the tent is the expiration P/L graph. The light arch where the blue dot site is the T0 P/L graph..or the P/L as of today give the price of SPX which is the X axis.
So this is a range bound trade because I would like SPX to stay roughly inside the tent. I say roughly because the downside is a bit more forgiving from a price risk point of view (delta/gamma) while the upside should get some IV help as IV tends to go down as the under goes up and this trade is short Vega and, thus, benefits from IV going down. This is because IV is most affected at the money and I sold 2 contracts near the money. So even though I have long hedges on each side, they have less positive Vega than my 2 shorts have negative Vega.
So from a non-directional point of view, I get delta/gamma help on the downside and some vega help on the upside. Meanwhile the shorts give me positive thata so while we stay in the tent time works for me rather than against me. Which in the options world is very nice since time only moves in one direction.
Is it a volatility play? Yes, but not exclusively. The idea is to try to get some benefit if IV comes down but get some price help if SPX goes down all while collecting time decay (theta). That’s the power of spreads. It also lets me trade a $6000 underlying in lots of 100 for around $1800.
This is a bit of an advanced strategy if you are new to options. I don’t just buy calls and puts. I put on spreads that buy and sell contracts at the same time. If you are familiar with simple vertical spreads, a butterfly is a debit spread and a credit spread (in puts in this example but it can also be done in calls) each of which has the same short strike. Not sure if that helps.
In this particular trade there are no calls involved. It’s all in the puts. I sold 2 puts near the money, at the time 5900. I then in the same transaction bought 1 put 100 points down from the shorts @ 5800 and one put 90 points up @ 5990. All in the Jan 17 expiration which was 29 days out at the time I opened the trade.
This produces a “tent” which describes the range under which the trade is profitable at expiration. The dark blue lines of the tent is the expiration P/L graph. The light arch where the blue dot site is the T0 P/L graph..or the P/L as of today give the price of SPX which is the X axis.
So this is a range bound trade because I would like SPX to stay roughly inside the tent. I say roughly because the downside is a bit more forgiving from a price risk point of view (delta/gamma) while the upside should get some IV help as IV tends to go down as the under goes up and this trade is short Vega and, thus, benefits from IV going down. This is because IV is most affected at the money and I sold 2 contracts near the money. So even though I have long hedges on each side, they have less positive Vega than my 2 shorts have negative Vega.
So from a non-directional point of view, I get delta/gamma help on the downside and some vega help on the upside. Meanwhile the shorts give me positive thata so while we stay in the tent time works for me rather than against me. Which in the options world is very nice since time only moves in one direction.
Is it a volatility play? Yes, but not exclusively. The idea is to try to get some benefit if IV comes down but get some price help if SPX goes down all while collecting time decay (theta). That’s the power of spreads. It also lets me trade a $6000 underlying in lots of 100 for around $1800.
This is a bit of an advanced strategy if you are new to options. I don’t just buy calls and puts. I put on spreads that buy and sell contracts at the same time. If you are familiar with simple vertical spreads, a butterfly is a debit spread and a credit spread (in puts in this example but it can also be done in calls) each of which has the same short strike. Not sure if that helps.