call butterfly

Discussion in 'Options' started by steve0580, Jan 10, 2006.

  1. MTE


    Yes, you are correct the max 2.5 is because of the distance between the wing and the body.

    With regards to the stock expiring at 26, there're a few things you can do. Basically, since you'll end up short 100 shares after expiry, because one of the 25 calls will be offset by the 22.5 call, yet the other 25 call will remain. So, unless you are willing to take on weekend gap risk and just cover the stock the following Monday, you can either:

    (a) close out the whole butterfly on Friday before close (or at least the 22.5 long and the two 25 shorts).

    (b) you can buy 100 shares at close on Friday, which will then offset the assignment on one of the 25 calls.
    #11     Jan 11, 2006
  2. Yes, the long butterfly is short vega, short gamma and long theta.

    It wants the underlying to sit still and gains value as time passes if in profit zone. It can be dissected as a short straddle with wings.

    The short butterfly is long vega, long gamma and short theta.

    It wants the underlying to move and decays over time. It can be dissected as a long straddle with wings.

    Riskarb's suggestion for referencing flies via their vega/gamma characteristic is probably a good one if folks are up to speed with the greeks. My fault for confusing the situation!


    #12     Jan 11, 2006
  3. zxcv1fu


    Check out:

    If you are buying butterflies, it is better to look for paying around 0.1 of the spread ($0.25 in your case). Do not pay too much since it is a low probability & high reward strategy. The premium does not open up until close to the last week. The max will be a little less than $2.5 close to the last second. Unless you exercise you probably will not get the full $2.5. Best to buy indice european style butteflies.
    #13     Jan 11, 2006