Short Butterfly OIL?
I was thinking of getting a short butterfly going for OIL. For those who don't know it's basically long volatility on OIL and a bet that the price of OIL will either be higher or lower than the current price. I think I can get a loss band of $1 of the ATM price, so I was thinking that a march or april expiration would be profitable.
Here's an idea what the strategy looks like:http://www.theoptionsguide.com/short-butterfly.as…
What's nice is that it's not unlimited loss. It's not unlimited gains either, but it's a more conservative bet.
Any thoughts?
If you're just playing for volatility buy a straddle.
One of the reasons you might want to sell the fly over just buying ats is you take advantage of selling convexity/GoV (gamma of vega/Volga). You may find it particularly attractive now because the wings in oil have been bid quite significantly. Keep in mind though that there is a reason you pay a premium for convexity... in this case (selling the fly) while you are long vol, you'd be getting shorter vol as vols increase.
It's all about your view really.
Volatility is probably priced in at very high levels right now.
^^I could do that. The only problem is that I would have to hold the underlying as it involves a put. Also, the earnings curve isn't as steep, so closer min point I don't get as much of a boost. It does give me unlimited upside though....There's a few positive and negatives that I'll have to consider. When would you consider a short butterfly as opposed to a long straddle?
^That's true, but if the payoff is that much more likely I'm willing to take the lower return. Especially if the market is trending down.
What do you make of straddles on high theta instruments like UCO?
If you have high theta (read time decay) you would have to make up for the fact that you're getting out of pocket more as you get closer to expiration by having higher initial money from the sale. I think all else equal I would want low theta right?
i was thinking the same thing, monkesama
Steve Schork of Schork Report predicts oil could go as low as $70-80 a barrel (don't remember the time frame) if ME unrest subsides. Of course, if unrest remains oil could shoot higher (to 220/bbl?!?!
I think playing volatility is a good move.
What time frame do you think would be best from a risk/reward standpoint. Expiration in March or maybe later this summer?
ATM vol is like 37% with a large smile spot 26, 21 strike is 56% and 35 is 78%
Do you have a link or where I can see that information real time?
Good work Sama! Now your thinking.
Ha! Thanks. I should get my option trading set up by tomorrow afternoon or Monday at the latest, and then I think I'm going to set up a strategy and run with it.
Good thought, but I would do a little more research, this play might have already been taken (remember Soros was quoted in 2008 predicting these political crisises), meaning there is no more room for profit and the potential Middle east actions is already priced into the the price of the option so what your are basically doing is betting that there will be a crisis in the middle east, This is pure speculation not an investment.
Eh, options are either a hedge against your investments or a pure speculative gamble. The possible exception being writing covered calls, but the best I can do is about 1.5 percent/month which isn't enough for me. I think that either the ME crisis will get REALLY bad in which case oil goes nuts, or people price in Libya and the rest of the ME uprisings are effectively quashed which would lower oil substantially. Bottom line I think the sure thing is that oil isn't going to stay where it's at. I just don't know what the margins are yet, admittedly, but once I have my options account set up we'll see what kind of costs I'm looking at.
Alright, did anyone else ask themselves "what the hell is butterfly oil, and how/why would you short it?" upon seeing the title of this thread?
please excuse my stupid question. When you are short butterflies are you also short gamma?
From: http://financial-dictionary.thefreedictionary.com/Gamma
Gamma A measure of how fast the delta changes. ...The larger the gamma, the more volatile the option contract is.
Short butterflies are a pro-volatility position. So it's actually long gamma.
Generally speaking you are long gamma in the middle and short gamma on the wings
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