There is something very comforting about having an OTM B-Fly for a credit I had a sm B-Fly for this month 1260/1270/1280 calls which I did close yesterday. Legged into it for a .20 debt. However a B-fly is NOT necessarily riskless it seems. Being a newby to B-fly's it did seem to me that on a cash settled index IF we closed AT 1280, because I have a 1270/1280 CREDIT spread I would have risk at abt 1275??? Since there is slim probability of the set being close to 1270 tomorrow I ended up closing the B-fly for .55. Earlier, Fri/Mon could have received probably 1.50//I think. Even yesterday the Mark ranged from -.25 to 1.20!!! I had to call to get a fill. My question to the class would be am I right? Would I have LOST money IF SET closed at 1280? Obviously if it closed at 1290 I'm fine since I'm long the 1280's. hummmm...it took me 10 minutes but I did figure it out...for the math challenged. The butterfly is a debt spread combined with a credit spread. I paid 4.90 for the debt spread and received 4.70 for the credit spread. To make my pencil calculations easier lets say it was $5 on both sides....sooo...at Set if we are anywhere over 1280 I receive $5 for the debt spread and I owe an additional $5 for the credit spread (as I had received $5) net 0. NOW you see why I NEED a BREAK
Since you paid .20 for the bfly you will lose money if SET is below 1260 or above 1280 (the .20 you spent for the bfly). Everywhere inbetween you make money right?
That's why I favor the market neutral double diagonals from a margin perspective. Importantly, also from a delta perspective; the two diagonals balance each other out. You need to be moderately bullish through to December for the diagonal you have placed to be successful. I don't know if that is consistent with your outlook. On front month expiration you could be left with a long leg trading at cab! Admittedly, not likely given back month tenor but you get the gist I hope. Did you estimate the roll potential for this diagonal to calculate risk/reward? As they say, more speed, less haste
Yes, the max risk on the fly is the debit paid for it (synthetically or otherwise). It's strange but true. It's like buying an option: you can't lose more than the debit paid. The break-even points would be very slightly >1260 and <1280 due to the $0.20 debit.
Would appreciate some thoughts. I am normally a directional trader but have started doing some credit spreads. I have 1315-1325 and 1320-1330 August. Would close or roll at about 10 points from short positions At what point today if it does not get that high do I need to worry about the set tomorrow. Thanks
Mo, I might open this diagonal for a wrong reason then. I wasn't bullish. I thought the market would stop going up short-term. I wanted to look for a vertical call but the premium was not attractive b/c of the low IV. I then looked for a call diagonal. This one had a very small -ve delta (-0.03), a high theta (0.11) and high vega (0.45). I got all these greeks favor my short-term outlook, and so I opened this trade. I didn't look at my roll potential. I am not sure if my decision is correct because I don't have any experience with multiroll diagonal. Any comments?
Mo, You're right, I'm still learning the rope with these diagonals and I think I prefer double diagonals for your reason above. I currently only have an AUG/SEP 1240/1210 PUT Diagonal and the delta neutral properties have gone out the window as SPX has moved up and we're at expiry. My diagonal is now looking more like a long PUT outright. The AUG delta gains is so minimal is no longer hedging my SEP delta losses, which is much heftier. Are you saying if I had a Call Diagonal....lets say 1325/1350, I would not have any losses?