Strategies · Library · Options
§2.40Volatility
Long call butterfly
Buy one call at a low strike and one at a high strike and sell two calls at the middle strike, all equally spaced. A bet the price ends near the middle strike, with loss limited to the net premium.
- Asset class
- Options
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Neutral: expects little movement and a finish close to the centre strike; low realised volatility helps.
- Entry and exit
- Buy a low-strike call, sell two middle-strike calls, buy a high-strike call, same expiry and equal spacing, for a small net debit. Hold to expiry; close early to bank a gain when the price sits at the middle.
- Sizing
- 1 long, 2 short, 1 long across three equally spaced strikes
How it fails
- Maximum loss is the small net premium, suffered if the price ends beyond either outer strike
- Best payoff only exists very near the middle strike; the profit zone is narrow
- Time decay helps once the price sits at the middle, but hurts if it drifts away
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 gold (or any asset) ends near a given level by a date matches a butterfly's view; paper only.
Needs options; a pinned-price payoff cannot be built from long-only holdings.
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, p. 33 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.