Friday, January 1, 2010

long call butterfly - basics

* all-call -- I don't know other flies, but you can have an all-call fly or (equally popular) an all-put fly.
** in FXO, not so simple

* equidistant -- among the 3 strikes.
** In FXO, equidistant in terms of delta. Eg 25 delta fly, where both "outside" options have delta values 0.25 away from the center

* size 1:2:1

* ATM - in the middle.



* wizard's hat -- the long call fly looks more like that than a butterfly.
Buy 1 ITM Call + Sell 2 ATM Call + Buy 1 OTM Call -- long call butterfly -- most common.
(sell the body buy the wings)

* less common in eqd -- short call butterfly, short PUT butterfly, long PUT butterfly



Q: For a long call butterfly, the 4 premiums always add up to a net Cost. If underlier stays unchanged till expiry, is the payoff intuitive?
A: not intuitive. Only the low-strike long call makes money and more than covers your premium net cost. Other 3 expire worthless.

Actually the 2 "extreme" outcomes are more intuitive --
$ all 4 expires OTM -- negative payoff == initial net cost
$ all 4 expires ITM -- You pay initial premium, and leave the rest to clearinghouse, who gives the 2 lots you acquired (Wings) to your (Body) buyers.

In both cases there's no more cash flow after the initial premium payment.

Q: How do you know if a butterfly strategy is long or short?
%%A: i don't think you can know.

Q: in FXO, why is the standard strangle also called a fly?

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