Forecasting Futures

Arbitrage Secrets: How to Create ‘Free’ Butterfly Spreads

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When ratio spreads move into a winning position they can be converted into so-called “free” butterfly spreads. When taking a position in the market, most investors and traders seek to minimize potential risks, while maximizing potential rewards.  In certain cases, this may even materialize in the form of “pure arbitrage”—a situation in which a position … Continued

Your Thinking Must be Skewed

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 It’s said with good authority that volatility “skew” was born Oct. 19, 1987, when the magnitude of the market drop on Black Monday indicated all those previously out-of-the-money (OTM) puts that were now in-the-money had been much too inexpensive. Before volatility skew entered the world, the theoretical value of options was determined by a single … Continued

Volatility and the Greeks

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The last time the markets moved with this much pace was the 2008-2009 Financial Crisis, which occurred not long after the introduction of the first iPhone. That means many investors and traders active in the current environment have never before observed, or dealt with, such dynamic markets. In some ways, less-experienced traders possess advantages in … Continued

The Butterfly Payoff

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What’s the right environment for the butterfly spread? While short straddles and strangles are great trades when investors want to speculate that a stock will not move much, the risk can seem too great. The long butterfly provides a potential alternative. A butterfly spread has low probability and low risk. That means there’s a low … Continued