Pages 106 and 107, I just didn't understand how the authors have calculated the negative delta of -28 for the example they described (SPX 1200/1270/1270/1320).
It is an example from the book by Chen and Sebastian "The Option Trader's Hedge Fund". pages 106 and 107, example with SPX 1220/1270/1270/1320, ATM iron butterfly
Exactly, in the normal case you would buy additional puts or short the stock to hedge the delta and you will be left with Volatility. Their whole angle is for you to find an undervalued Put Scew, one where the Put Scew is not as high as it usually is and then sell the Butterfly to gain from the IV Crush and Correction
If it's the last thing I do on this planet,its going to get you stop referring to call side vs put side and get you to talk in terms of percent of Spot
@ OP . Did you get adequate answer to your quest? If you were perplexed as to "WHY", a look at where the position is placed along the volatility curve (skew) and the shape of that curve should provide insight. Most trades are placed on the left side of the "smile", where the call side iv is more compressed. Note that the low point in the IV is typically at a very high underlying value. If you examine some Iron Flys placed above this IV inflection point, you will observe that they will have a positive Delta.
Ahh, after looking at the quote again, I realized. I got that book too, actually one of the better option books!
Whats so bizarre about this post, is I thought about posting the exact same thing a few weeks back. Anyway, I have that book, its (surprisingly) very good, most option books are basic stuff, very view offer real decent info. I was perplexed by their chapter on ATM Iron Flies as well. I never saw anyone use ATR to trade fly's, so I was drawn in. ATR is one of the view technical indicators I actually use and like because its a measurement of spot vol. I'm interested on why the delta is negative as well. I'm assuming its because of the inherent negative skew present in equities. The velocity of moneyness to the downside is much worrysome than upwards. Also when prices go down, this increases the leverage of a company. Thus this negative skew will be present, even in ATM iron's and other option strategies. Correct me if i'm wrong but this is whats causing (slightly) negative delta. And remember how greeks oscillate with spot, when spot is under the ortho-center(body) its +delta, as spot drifts to the body, and above it, now has accumulated neg delta. Delta is telling you where it wants spot to go.
Dont have the book,but its pretty dam clear its a typo,or you are looking at one savage skew.. The wings on the fly are apx 4 percent wide. Go find me a 96 percent spot vs 104 percent spot in the SPY/SPX with a Delta differential that nets out to 28.. You find it,put the risk reversal on(delta neutral/slightly underhedge) and thank me later Im waiting
Guys another thing that I'm trying to understand from that same chapter is the concept of tightening the wings to secure the profit of the ATM Iron Butterfly, once it's there (pages 103-104). They say it's a good adjustment technique at ~10% profit. If I get this right, by doing this you will have spent all the profit from the depreciation of the short "thorax" on more expensive longs than what you had before (tightening the long strangle). So effectively at that point you'll be left with zero profit? And then, my understanding was that if the underlying moves sharp in either direction - the idea is that the appreciation of the "winning" long wing will be bigger then the depreciation of the losing wing due to its then-higher delta (so gamma will play to your advantage by accelerating the delta of the "winning" wing and decelerating the loss of the losing?). And then the theta will continue to take care of the short "thorax" which is now OTM? And if the underlying remains flat - then the theta of the ATM shorts will work faster than that of the OTM longs and I win anyway? Did I get this right and if not what have I missed? Thanks a lot guys!
FYI: (prior topic reference) Previously I posted about why the ATM Iron Fly had negative delta. Here is a plot of IV curves (smiles) for SPX from 14 - 90 Days to Expiration for reference. The red circled region is where most trading occurs. The heavy black horizontal dots are ATM. Note: in all cases the lowpoint of the IV smile is far to the right. A picture is often helpful to understand some topics.