Strategies · Library · Options
§2.43Volatility
Short put butterfly
Sell puts at a high and a low strike and buy two puts at the middle, equally spaced, for a net credit. It profits from a move away from the middle, with small reward and limited loss.
- 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 away from a quiet level, either way; higher volatility helps.
- Entry and exit
- Sell a high-strike put, buy two middle-strike puts, sell a low-strike put, same expiry and spacing, for a credit. Hold to expiry or exit early after a large move.
- Sizing
- 1 short, 2 long, 1 short across three equally spaced put strikes
How it fails
- Reward is limited to the credit, earned only if the price ends outside the outer strikes
- Worst loss is the spacing minus the credit if the price lands at the middle strike
- The long middle puts decay if nothing happens
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 the VIX or an index ends well away from a level by a date, either direction, matches this view; paper only.
Needs options; no long-only holding gives a payoff 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, §2.43, p. 34 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.