Greetings! I’m trying to learn more about the Greeks and can’t find my way past why the delta on a long fly becomes more negative as price goes up and vice versa. Please help!
The delta of a fly (any vanilla structure that consists of a number of option contracts put together) is just the sum of deltas of all legs.
EdKaim on
When you say “long” butterfly I assume you mean a long put/call butterfly. This might seem pedantic, but those trades are a net debit to enter but are comparable to an iron butterfly, which is a net credit trade and I just want to scope in on the scenario I’m discussing.
The sweet spot for long put/call butterflies or iron butterflies is at the middle strike. As you move away from that strike up *or* down, your trade loses an increasing amount of value. When you reach your edge strike the acceleration should start to decrease until it flattens out as a total loss. Note that if you’re pricing at expiration everything will be measured in absolutes, the angles will be very crisp at strikes.
This probably seems obvious by looking at a payoff diagram, but it ties back into the relationship of delta and gamma. While delta is the rate of change relative to the underlying price, it’s just a measurement at a moment in time based on the slope of a curve. As a result, it’s always changing. The rate of that change is gamma, which is why delta becomes more negative as you approach an edge strike from the middle strike.
2 Comments
The delta of a fly (any vanilla structure that consists of a number of option contracts put together) is just the sum of deltas of all legs.
When you say “long” butterfly I assume you mean a long put/call butterfly. This might seem pedantic, but those trades are a net debit to enter but are comparable to an iron butterfly, which is a net credit trade and I just want to scope in on the scenario I’m discussing.
The sweet spot for long put/call butterflies or iron butterflies is at the middle strike. As you move away from that strike up *or* down, your trade loses an increasing amount of value. When you reach your edge strike the acceleration should start to decrease until it flattens out as a total loss. Note that if you’re pricing at expiration everything will be measured in absolutes, the angles will be very crisp at strikes.
This probably seems obvious by looking at a payoff diagram, but it ties back into the relationship of delta and gamma. While delta is the rate of change relative to the underlying price, it’s just a measurement at a moment in time based on the slope of a curve. As a result, it’s always changing. The rate of that change is gamma, which is why delta becomes more negative as you approach an edge strike from the middle strike.