Strategies · Library · Options
§2.45Volatility
“Short” iron butterfly
Buy an at-the-money put and call at one strike and sell a lower put and a higher call, equally spaced, for a net debit. It profits if the price moves away from the middle, with defined 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 larger move than the market prices, either direction, but not an extreme one; rising implied volatility helps.
- Entry and exit
- Buy a put and a call at the middle strike; sell a lower-strike put and a higher-strike call, same expiry, paying a net debit. Hold to expiry, or close early after a strong move.
- Sizing
- 1 long put, 1 long call at the middle, 1 short put and 1 short call as wings
How it fails
- Maximum loss is the net debit, lost if the price ends at the middle strike
- Gain is capped at the wing width less the debit, so very large moves do not pay more
- Time decay works against the position while the price sits near the middle
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 moves meaningfully off a level by a date, direction open, matches this view; paper only.
Needs options; the payoff depends on size of move, not on a held position.
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, §2.45, p. 35 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.