Strategies · Library · Options
§2.44Hedges and structures
“Long” iron butterfly
Sell an at-the-money put and call at the same strike, and buy a put below and a call above as protection, equally spaced, for a credit. Earns most if the price finishes at the middle strike.
- 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 a quiet market with low volatility that settles near the centre.
- Entry and exit
- Sell a put and call at the middle strike; buy a lower-strike put and a higher-strike call, same expiry, collecting a credit. Hold to expiry or close early with most of the credit kept.
- Sizing
- 1 short put, 1 short call at the middle, 1 long put and 1 long call as wings
How it fails
- Maximum gain is the credit, achieved only if the price ends at the middle strike
- Maximum loss is the wing width less the credit, reached beyond either wing
- Time decay is the profit source; a sudden jump in volatility or price causes the loss
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 index closes near a stated level on a date, as an income-style view, matches this; paper only.
Needs options and short sales of options.
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.44, p. 35 of the SSRN version. Described in our words. Hedges and structures is ARCANE’s filing, not the book’s.