I have tried wrapping my head around selling an IF, and I am not grasping it. Can someone explain the difference between an IF and Butterfly, and how an IF works? Thank you, James
The difference is "skew." Post up a bunch of near-market calls and puts. "Near-market" means above and below. Construct a call Bfy, a put Bfy, and an iron Bfy. Check out the pricing against the net delta of the positions. Do this again for half-a-dozen expirations, going out maybe by as much as 90 days. (5 weeklys would show it, though...) Check out the differences in the same positions over time. (i.e., with decreasing DTE.) The differences you'll see are based in the same things that push ITM puts and ITM calls to be different than their (call;put) inverses.
If you short both the P/L and range are inverted. If you buy one and short the other, they are very similar. https://www.lightspeed.com/trading-education-center/short-call-butterfly/ https://www.lightspeed.com/trading-education-center/short-iron-butterfly/
They are simply synthetics of each (other). A GOOGL 1100/1200/1300 call or put fly at 75 is a short iron fly at a 25 credit.
When vol camps out below 10.0, this compresses broken-wing butterflies to a range just inside a vertical spread of the same net premium -- leaving the seller with an ability to roll away (to a vertical) as a revenue-neutral operation. This describes much of my 2016-2017. But just buying and selling regular butterflies? Nah. Outside of building/rolling for other purposes, only rarely.
Polite request - are you able to provide an example with numbers (doesn't have to be a real trade, just some numbers, strikes etc would suffice). It would help me understand better.
Not to hijack a thread, but I posted this about a week ago, to a thread where you were the next poster: The four data columns show a 1 strike x 2 strike BWButterfly, then 1-strike, 2-strike, and 3-strike verticals. The highlighted cells are combos ~26¢ to 41¢. In the closest DTE week, rolling from BWB at cell H158 to the vertical at I158 would take the position from 37¢ to 41¢ -- just about covering commissions. In the second DTE week, rolling from BWB at cell N160 to the 1-strike vertical at O164 would about do the same thing. The vol listed here is ~15, so there is a bigger jump (i.e., a bigger sacrifice in breathing room) in going back and forth between a vertical and the BWB, but in a low-vol environment, it's not that big, and if you can wait until the long strike deltas to be > the middle/short strike deltas, an approach of your position makes you money. The position delta here (3020) is .201-[2x.160]+.092 = -0.027 → You're losing money with every point of approach. When that number is positive, guess what!! The position you sold can now be "bought" back for a negative price. (Look in the last 24 hours...)