Are there strategies of “Short Butterfly Call” & “Short Butterfly Put” ? What are their following characteristics ? Value Profit Maximum profit Maximum loss Breakeven Prices Thanks !
alta168 Wrote: ------------------------------------------------------- > Are there strategies of “Short Butterfly Call” & > “Short Butterfly Put” ? What are their following > characteristics ? > > Value > Profit > Maximum profit > Maximum loss > Breakeven Prices > > Thanks ! Short butterfly call: For example, Short call at strike price 25 (A), Long two calls at strike price 30 (B) and short call at strike price 35 © Max Profit: Limited to net premium received Max loss: 30 - 25 - Net premium Break even: Higher strike less net premium or lower strike plus net premium Short butterfly put: Same as short butterfly call
Some more details - Short Call Butterfly is a neutral strategy and only used when trader is expecting a high volatility. This is a Limited Risk Limited Profit Strategy
Break even: Higher strike less net premium … I’ll write it down. Why is the net premium (2*C_M0 - C_L0 - C_H0) > 0?
net premium (-2*C_M0 + C_L0 + C_H0) > 0?
deriv108 Wrote: ------------------------------------------------------- > net premium (-2*C_M0 + C_L0 + C_H0) > 0? Shall this for LONG butterfly call ? Is (2*C_M0 - C_L0 - C_H0) > 0 correct one ?
AMA, I could make it wrong on the exam day. I’m not sure which one is correct now. The net premium is collected by the seller of the butterfly spread. The net premium is (-2*C_M0 + C_L0 + C_H0). Please correct me if I’m wrong.
I think it depends on your definition. My definition : Premium is the initial cost PAID. LONG butterfly call : Long a low call + Long a high call + Sell 2 medium call, so the premium paid = (-2*C_M0 + C_L0 + C_H0) If your definition is the $ RECEIVED then the opposite shall be true.
AMA Wrote: ------------------------------------------------------- > I think it depends on your definition. My > definition : Premium is the initial cost PAID. > > LONG butterfly call : Long a low call + Long a > high call + Sell 2 medium call, so the premium > paid = (-2*C_M0 + C_L0 + C_H0) > > If your definition is the $ RECEIVED then the > opposite shall be true. Agreed.
Thanks. My initial post was wrong. I was wondering why C_L + C_H > 2*C_M, where C is call option price. Volatility smile can explain it. Anything else?
There is a detailed excel sheet available at FinQuiz. This excel sheet lists Profit, Max Profit, Max Loss, Break-even for all twelve strategies.
mitchells, how can I get the spread sheet? I can’t find it at FinQuiz.
what is your email, i can send it to you right now
mitchells, thank you so much. I got it.
mitchells Wrote: ------------------------------------------------------- > There is a detailed excel sheet available at > FinQuiz. This excel sheet lists Profit, Max > Profit, Max Loss, Break-even for all twelve > strategies. mitchells, thanks again for the spreadsheet. It’s great. Here are a few follow-up questions: 1) Butterfly Put: there is only one breakeven price in the spreadsheet. Is the other price = 2*X_M - X_H + P_L0 + P_H0 - 2*P_M0? 2) A Butterfly(put or call) does have to be symmetric. That is, (X_H-X_M) may not equal to (X_M-X_L). Can you confirm it? 3) When shall we choose Butterfly Put over Butterfly Call? On Curriculum, Vol 5, page 422, it says choosing Butterfly Put when the Puts are underpriced, but a Butterfly has long&short in it… I don’t quite understand it. Can you elaborate on it?
deriv108 Wrote: ------------------------------------------------------- > 1) Butterfly Put: there is only one breakeven > price in the spreadsheet. > Is the other price = > 2*X_M - X_H + P_L0 + P_H0 - 2*P_M0? > > 2) A Butterfly(put or call) does have to be > symmetric. That is, > (X_H-X_M) may not equal > to (X_M-X_L). Can you confirm it? > > 3) When shall we choose Butterfly Put over > Butterfly Call? On Curriculum, Vol 5, page 422, it > says choosing Butterfly Put when the Puts are > underpriced, but a Butterfly has long&short in > it… I don’t quite understand it. Can you > elaborate on it? 1. X_L + P_L0 + P_H0 - 2*P_M0 I don’t know why it complicated the breakeven in butterfly call 2. I think it will be a variation of butterfly (put or call). It is not in CFA curriculum so I wouldn’t worry. 3. Dont know because both give the same results.