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marameo

Registered: Aug 2012
Posts: 40

11-14-12 08:43 PM

I have a question about long-term butterflies; why are they usually cheaper with months to go and become more expensive when expiration date is approaching?

Would it be good to open them alobng the way?

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cdcaveman

Registered: Aug 2011
Posts: 3518

11-14-12 08:51 PM

Quote from marameo:

I have a question about long-term butterflies; why are they usually cheaper with months to go and become more expensive when expiration date is approaching?

Would it be good to open them alobng the way?

thats a very simple question... options are more expensive the farther you go out in time.. obviously there are many ways to explain why.. but simply .. the more time, the more probability they could go into the money. hence them being more expensive.. expensive is a relative term.. meaning usually when talking about options pricing.. expensive means that you are saying they are price over fair value..

options lose value over time.. if your are net short premium you gain from the underlying not moving and the decay of the options..
in a fly you are net short premium.. your long two wings.. which is a small amount of money.. and short two atm's which is net short alot more premium then you are long.. so the wings lose value at a faster rate then the atm's do.. but cumulatively it equates out to less dollars then the atm's lose..

example.. two atm options = 100 bucks
two otm options = 10 bucks
if you lose 50 percent on the otm's and only 35 percent on the atm's your up because 50 percent of 10 bucks leaves you with 5 bucks.. and losing 35 percent of 100 bucks gives you 65 bucks.. for a net gain of 30 bucks.. you lost 30 dollars more in premium in the options that you sold then the options that you bought.

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Twinsen

Registered: Feb 2009
Posts: 44

04-30-13 11:32 AM

Quote from atticus:

I agree that flies are a poor long vol trade. Why limit the outlier for what's often a asymmetric risk? A straddle and a fly converge as you add width to the strikes, so if you knock the fly it's also an argument against the straddle. Narrow flies are not a bet on anything but a pin.

Gamma trading an ATM option IS a straddle.

So what to trade for the upstairs guy who wants long vola and doesn't want to ratio into some moronic naked short wing calendar? (Why trade the ratio calendar/diag when it quickly flips modality on vega?)

I like 1:1 diags which solve for a minimal gain if DITM, but hit max payout at mid (between spot and strike). Nearly flat gamma and a few thetas.

atticus, please give a live example of such a diagonal.
Do you sell deeper in the money than you buying, or you buy deeper in the money than you selling. Do you initiate this spread DITM or ATM?

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