I understand butterflies benefit from high volatility. However, what if it's OTM? Something that doesn't make sense to me is if: Stock is trading at $150: Buy 1x 165 Call Sell 2x 160 Call Buy 1x 155 Call how does volatility impact this? Wouldn't IV decrease if the stock approaches the 2 short calls?
You are a bit off on your vol and Bfly belief.. You can always simulate B flys and change move vol up and down to see its affect,but I think you are better served if you understand it intuitively.. Lets start with an ATM fly.. If vol goes to zero,the chances of the stock staying at the short strike goes up..Thats a good thing if you are long the fly... If you are looking to put on an OTM fly,25 percent away, do you think you have a better chance of the stock moving 25 percent if the vol is high or low?? ATM flys react differently to vol moves than OTM.. Think about it and then simulate
At expiration IV doesn't matter. Before expiration: a falling IV is good, a rising IV is bad. Not necessarily.
Here's Chevron CVX trading about $150, a 20 IV stock, 23 DTE. The vega graph is the bottom one. You can see that vega starts positive due to the 155 strike's vega being larger than 2x 160 strike. As the stock price moves up the 160 has more effect. https://gyazo.com/fd16fb61251d2cfcf5500b11219c32e9