Strategies · Library · Options
§2.41.1Volatility
Modified put butterfly
A variant of §2.41 Long put butterfly
A put butterfly with uneven strike spacing so the top wing is tight and the bottom wing wide. It keeps the neutral view with a mild bullish bias and should ideally be done for a credit.
- 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 gentle upward bias; expects a finish near the middle or slightly above.
- Entry and exit
- Buy low and high puts and sell two middle puts, same expiry, with the upper strike nearer the middle than the lower strike. Aim for a net credit; hold to expiry or close early.
- Sizing
- 1 long, 2 short, 1 long at uneven spacing
How it fails
- Because the wings are unequal, the loss below the lowest strike can exceed the net premium, so the cap depends on the credit received
- Profit zone is narrow, around the middle strike
- Decay helps near the centre only
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 at or just above a level, not below it, within a tight range matches this view; paper only.
Needs options; the payoff depends on pinned expiry values.
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, §2.41.1, p. 34 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.