Butterfly Volatility
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photo credit: Nick.Fisher
While changes in volatility will have an effect on butterfly positions - I’ve found that they are always less severe than they are say in a strategy like the calendar or double calendar spread.
With butterflies (as well as iron condors) a decrease in volatility will help your position - while an increase in volatility hurts it. However - while an increase in volatility can have a negative impact on your current profit and loss in a butterfly position - it doesn’t have an effect on your FINAL profit potential - your ‘Expiration Line’ on your option risk graph - so while you’re in a trade if the going gets rough and vols spike up - you can always feel confident that the profit potential that’s showing in your ‘profit tent’ is ‘real’ and if you can just successfully manage your way through the move that is occurring it’s yours for the eventually taking.
On the other hand - with a strategy like the calendar spread - or double calendar - changes in volatility can have a drastic - and even damaging effect. The ‘total profit potential tent’ you see on the risk graph at the inception of a calendar trade isn’t at all what you can always count on getting - as changes in volatility can raise and lower that tent dramatically - possibly putting your position suddenly way under water - leaving you with very little you can do to fix it.
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