Any thoughts on the edge 231 v 121 ... maybe Des could chip in as a 231 seems to be a 'Pitchfork' with long wings ?
In general, or a specific trade? 121 fly is the default position. One would opt for 231 when there is some level of skew (in this case to downside). If otm puts are increasingly skewed, then a 231 is a cheaper way to make same bet. This is because of the deep otm put wing in the 121. This option is often more expensive, due to higher vol, than other legs. So by kicking in that side (halving distance between body and put wing) you are long option with lower vol. But you have to buy 2 of them. So if the body strike you sold is high enough vol, being short 3 allows you to leverage the rich part of curve. To compare 121/232, sum the product of vols and qty. So for strikes 80,85,90,100 vols are 16,14,13,11. 80/90/100 121 vol sum = 1.00. 85/90/100 231 vol sum = 0. The 231 has 1pt greater vol edge. If trades have similar deltas, the 231 will be cheaper.
Interesting, and thanks for sharing The difference between the 80-90-100 121 Fly and 85-90-100 231 Fly is short the 80-85-90 121 Fly I guess what you are saying is ... if the 80-85-90 121 Fly is rich enough to be worth selling ... then the credit reduces the cost / risk in the trade ?
There is also a these can all be calculated using PF. We are looking to sell the straddle (weighted) and buy strangle. Your goal is to try to preserve the straddle premium, or credit, and choose widest wings. If fly price equals straddle premium that means you are buying free wings. So for 231 it’s short 2 puts and 1 call. Find the strike that that has highest credit with widest BEs -/+ spot. Then pick wings long 2 puts, 1 call that allows for biggest credit. You can do this for every listed strike. I run straddles (body) and strangled (wings) for all strikes. I do for all 5 types 121,132,231,253,352. I then compute deltas for weighted straddles. For each type, the strike that yields delta closest to zero is the optimal “sale” or short strike. This is PF method. PF is 3x1 for 1 strike outside straddle range. This yields delta neutral spread, typically around 25 Delta. I then add the strangle that is at least as wide as the body value*ratio multiplier. 121 = 2, 132/231= 1.5, 253/352 = 1.67 (ratio of short qty to max wing qty). This routine, in theory, will generate the ideal body strike to sell, and cheapest wings to buy. I don’t blindly trade the output, but it’s a useful exercise to develop relative comparison of otm/atm strike vols. If I just wanted to sell strike with highest vol, I would have to keep going further otm down (in index). While the vols get steeper, the delta of trade is more pronounced, thus they aren’t same trade. Key takeaway; how do we compare prices/vols for different strike/deltas? Add to call/put side to make delta-neutral.
Sounds like a plan ... as Delta is a key component ... do you derive your own Delta ... or use whatever is provided by broker?
The only data I import from broker are bid/ask prices for each strike. Vols/Greeks are derived from option prices. Vol curve is interpolated/smoothed using cubic spline, and adjusted for p/c parity. Rates are interpolated from treasury yield curve, DTE adjusted for am/pm settlement, holidays. For index, euro-style, I use BSM. For Equity/American it’s binomial, adjusted for Divs. For any bespoke calcs (PF, straddles, atm vols) I derive floating, OTC, penny-strike values. Values are robust, runs very smooth with r/t data, refreshes every 2 ms.