Strategies · Library · Options
§2.42Volatility
Short call butterfly
Sell calls at a low and a high strike and buy two calls at the middle strike, equally spaced, for a net credit. A bet the price will move away from the middle, with a small reward and limited risk.
- Asset class
- Options
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Expects a breakout from a quiet range in either direction; rising volatility helps.
- Entry and exit
- Sell a low-strike call, buy two middle-strike calls, sell a high-strike call, same expiry and spacing, taking a credit. Hold to expiry or close early on a large move.
- Sizing
- 1 short, 2 long, 1 short across three equally spaced strikes
How it fails
- Maximum gain is the credit and is kept only if the price ends beyond an outer strike
- Maximum loss is the strike spacing less the credit, hit if the price ends exactly at the middle
- Time decay hurts the long middle calls when the price stays put
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 leaves a tight range by a date, direction unspecified, matches this view; paper only.
Needs options; payoff is a bet against a pinned price.
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, §2.42, p. 34 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.