CFA CFA Level 3 Butterfly spreads – anyone use them?

Butterfly spreads – anyone use them?

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    • Avatar of mitch895mitch895
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        Thanks @rsparks – yes, understand the concepts behind pricing and have a fair bit of experience with commissions for retail-sized trades, suppose was more thinking of what the rates look like at a wholesale level.  Specifically if the equivalent interest rate was at the risk-free rate it must be lower than the retail borrowing rate.  Given the protection costs for most investors tend to be >1.5% above the retail lending rate, which for most Australian banks tends to track at around >2.3% over the risk-free, that would suggest that using options to establish the position is in the order of 3.8% less expensive that what is currently offered to retail investors, or 2.5% less expensive after my fee 🙂  

        Haven’t heard of iron condors before – had to Google that one! 🙂

      • Avatar of itsalwayslupusitsalwayslupus
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          Are you interested from a personal finance perspective, or professionally?

        • Avatar of rsparksrsparks
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            • CFA Level 2
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            I would suggest as an additional resource, looking at Tasty Trade option strategies. They have an excellent trade platform and educational resources.

            I trade options a bit but use a similar strategy with iron condors. The one thing you are not considering is the commission on four option legs. You need to  have a good understanding of implied volatility and implied volatility rank. You need to consider collateral with credit spreads too.

            if you are looking at sizing your position, kelly criterion can be useful.

            From what assume, you are talking about the pricing of options in relation to the interest rate?

            When interest rates are higher call options prices are higher

            when IR (interest rates) are higher opportunity costs of holding
            money is higher. By using call options investors save more money by not
            paying for the underlying until later date and earn higher interest
            meanwhile.

            The higher the interest rate you can earn on the cash you will use to
            make that purchase, the greater the benefit of being able to delay that
            purchase.

            When interest rates are higher put options prices are lower

            when IR are higher opportunity costs of waiting is higher because investors lose more interest while waiting to sell the underlying when using puts.

            the higher interest rate you can earn on the cash generated from that sale, the less desirable it is to delay that sale.

          • Avatar of mitch895mitch895
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              Are you interested from a personal finance perspective, or professionally?

              Both 😉

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