Butterflies benefit from high IV.
Calendars benefit from low IV.
Instead of shorting calls, would it be safer to just create a Put Calendar spread if you want to fade a move? Also would it make sense to follow up with a butterfly? Since the IV is up now.
Are Calendar spreads the inverse of butterflies?
byu/How_Much2 inoptions
Posted by How_Much2
4 Comments
Calendars and butterflies aren’t exact inverses, but you’re right about their different IV setups. Using a put calendar to fade a move could work in low IV situations. Following it up with a butterfly when IV rises might make sense if you want to capitalize on the changing environment. It all depends on how you see volatility playing out.
They are in the same ballpark but some differences –
Typically you’ll have a much wider profit net with calendars, but a much lower max gain (still pretty good though)
After you open the trade, it’s better for the FLY if IV decreases when you are inside the profit zone.
After you open a calendar, it’s better if IV increases, more specifically, it’s better if the back exp’s IV increases. This will increase your profit area and increase your max gain.
I would use calendars if I have a reason to expect IV to increase. Even if nothing is going on, IV will tend to rise from the end of the week, up until mid next week because that’s when we get Econ data. So lots of opportunities to find IV trades. If I think IV will stay the same or decrease, I would use a FLY
Stop over thinking everything and start just thinking.
Calendars benefit from low IV doesn’t make sense. You can buy a calendar or sell a calendar and they can both make money in time of low volatility and high volatility. Depending on if the vol curve is inverted and how much the front month moves vs the back month. So saying calendars benefit from low IV without even considering where vol is at, or if you’re short or long them just doesn’t make sense.
Butterflies are maxed out when the middle is pinned if you’re long them or as far away as possible if you’re short them.
Instead of saying create a put calendar… you need to specify if you’re long or short it… then how do you follow up with a butterfly?
Sounds like you want to take advantage of a scenario where vol increases. So ultimately you just need to be long Vega.
If you can pinpoint where the underlying will print yes buy a fly and have it pin the middle. But you you have that kind of foresight there are many petter ways to maximize profit than buying a butterfly
I don’t agree that calendars benefit from Low IV
e.g. if you think earnings are gonna be a dud -but the stock will be a good long term performer you benefit from high IV from the earnings. The IV crushes in 2 days but your long calls are fine and you’ve paid for a good chunk of them. If the stock goes up from there- it’s all gravy.