Strategies · Library · Options
§2.40.1Volatility
Modified call butterfly
A variant of §2.40 Long call butterfly
A call butterfly where the outer strikes are not evenly spaced, with the upper wing closer to the middle than the lower one. It keeps the neutral view but leans slightly bullish.
- Asset class
- Options
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Mostly neutral with a mild upward bias; expects a finish just above the centre rather than below it.
- Entry and exit
- Same four legs as the plain call butterfly, one expiry, but place the top strike nearer the middle strike than the bottom strike. Hold to expiry or close early on a gain.
- Sizing
- 1 long, 2 short, 1 long at uneven spacing
How it fails
- Loss limited to the net premium paid; it happens beyond the outer strikes
- The unequal wings make the peak payoff smaller than the best case on the lower side and narrow the profitable zone
- Decay behaves like the plain butterfly, helping only when the price is near the centre
Data it needs
- options chain with strikes and premiums
- implied volatility
- underlying daily price
ARCANE has the underlying daily close but no options chains or implied volatilities
How ARCANE uses it
A Call that an asset finishes slightly above a stated level, within a tight range, matches this view; paper only.
Needs options; the payoff has a narrow peak that holdings cannot copy.
Filed under the volatility card
Hold less after a month of high volatility and more after a calm one. The paper found this raised return per unit of risk, because volatile spells are not paid for with higher returns.
A paper plan from this card holds 5 to 63 days, stops at 2.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.40.1, p. 33 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.