I've been playing around with Options Profit Calculator. I was analyzing a neutral butterfly and experimented with changes in IV and how it impacts the profitability of the spread. The spread I was analyzing was September 30 expiration 270/275/280 call spread. The QQQ is currently at 275.51. If IV increases by 10%, the profitability of the spread immediately goes down significantly. How common is it to trade a neutral butterfly spread only to see it become unprofitable due to an IV increase? Is this the #1 problem when trading neutral butterflies? Thanks
I can't confirm your analysis; it seems you are doing something wrong, or the tool you use (I've no experience with it) . See this tool instead: https://optioncreator.com/st5b6uu A 10% increase of "net IV" would in this case mean going from about 30 to 33 (or even 40 if you mean it that way), and the impact of this is minimal. It's also unclear what timeframe you mean. If you mean the situation at expiration, then there is no change in the outcome, as then IVs don't play any role anymore... Then only the price of the underlying plays a role.
Havent checked the greeks,but you need to have a better gut feel for your position.... Think about it,if you are long the ATM fly,the dream scenario is for the stock to sit exactly at the short strike..You don't want it to move..Low IV is your friend.. Significantly higher IV implies the stock will likely move away from the ATM short strike of the FLy,hence making the fly cheaper...High IV is your enemy... Think about the flip side of the equation.You slap on a really cheap fly,way out of the money.. Would IV going up or down make it more valuable?? Understanding the Greeks is great,but you should also have an intuitive,common sense understanding as well