231 Butterflies

Will check it later when I get home, don't have TOS here. Thank you.

 

But I have 4 guitars and also TWS, TOS, TC2000. At least I can try.

 

Can you this set up as a way of defending the short strike. Fir example buying equal number of contracts to the short leg and finance it by selling unbalanced call butterfly?

 

132 flies (asymmetric payoff; debit = risk) should be traded so that they can survive a a touch of the body strike (or) traded close enough to ATM to replicate deltas in spot.

 

Are there any guidelines how we name these? 132 or 231 and do we then place the strikes in ascending order? This is what I would do, but please advise if I'm wrong.
Anyway the are only two ways of placing that trade. Here is one and I don't think Des would go for this.

 

And here is the other, not too promising either.

 

132s are calls; 231s are puts. Ascending strikes.

 

Say you’re bearish and the 25D risk-reversal is trading -400 (puts are trading at 14 vol and calls are at 10). ATM vol is at 12.6% and you’re targeting neutrality which is 10 SPX above the body strike.

The targeted body strike is trading 13.7%.

You’re expecting the vol at the neutral strike to be 12.7% and perhaps 12.3% on the body. You buy a bearish 132C fly neutral to 10 points under the body and you’ll pick up 100bp in vol due to stickiness. Your deep ITM long gains a bit as well (on vol) and higher moments as it begins to become active (on moments), but offset due to skew on the (now) deep OTM two lot wing. IOW, you’ve just made a ton on delta as well as isolating the sticky-gains to the body by offsets on the (gains) ITM leg and (losses) the OTM leg.

A simplistic example of how to gain from stickiness against a rally in strip vols. The call fly is a synthetic OTM put fly and very cheap in premium terms. You can earn more in sticky-gains that the debit you pay. Not likely, but possible.

You trade the call fly in lieu of the put fly due to microstructure—as you expect the body strike to be OTM when you cover.

 

The deep ITM call starts to gain from dg/dspot and to a lesser extent dg/dvol as the delta drops in the deep ITM leg. Vega > skew > stickiness > dg/ds > dg/dv.

The key to the wingspreads is that the deep ITM becomes active on higher moments as the deep OTM becomes inactive.

 

I’ve had to edit a lot as I am typing on my phone at a rest stop coming back from SF. TL;DR? How/Why exploit skew with flies.