Report Date: 29-Sep-2023
Debit Iron Butterfly Spreads involve selling both an out-of-the-money call and an out-of-the-money put, while buying an at-the-money call and an at-the-money put (on the same strike) for a particular expiration of a selected underlying asset. Because you are buying two higher-premium options and selling lower-premium ones, the strategy requires a net outlay of premium at the time of the trade.
The goal for this strategy would be for the stock price to have a big swing away from the current spot price (in either direction). The maximum loss is experienced when the stock price at expiration is right at the strike price of the specified at-the-money strike.
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Outlook:Large Stock Move Away
from Current Price
Option ParametersUnderlying Stock IdeasHistorical Distribution & Payoffs
Strategy Parameters | Events | Theoretical Edge | |||
---|---|---|---|---|---|
In Watchlist | Earnings Date | Theoretical Edge A positive edge (in green) is when the current market price of the spread is a good deal in relation to the theoretical value calculated from the historical distribution. | |||
Expiration |
20 Days to Exp (14 Trading Days) |
Ex-Dividend | Theo Win Rate The frequency with which the current market price of the spread would have resulted in positive returns by expiration, based on the historical price changes available for this analysis. | ||
Bid-Ask Spread | Company Event | Show Best Only This filter will show you only the best available entry per symbol if selected, taking into consideration the other filters already applied. |
Stock Details |
Debit (Amount at Risk) |
Theoretical Value | Debit Butterfly Details | Option Risk Profile | Events | Volatility | Technical Indicators | Stock Price Return Distribution for Historical Holding Period Over Selected Timeframe |
Strategy Payoff Scenarios | |||||||||||||||||||||||||||||||||||||||||||
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Symbol | Name | Stock Price | % Chg | Market Cap |
Market Price The net outlay in option premium by executing this spread trade. Because the options you're buying are a higher cost than the options you're selling, you are paying out the net difference in prices. This amount also corresponds to the maximum loss you can experience from the spread. |
Theo. Value Using a historical price return distribution for holding periods matching the # of days to expiration, we calculate a theoretical value of the current strategy based on historical price changes available in this analysis. |
Theo. Edge A positive edge (in green) is when the current market price of the strategy is a good deal in relation to the theoretical value calculated from the historical distribution. |
% Win Rate The frequency with which the current market price of the strategy would have resulted in positive returns by expiration, based on the historical price changes available in this analysis. |
Sharpe Ratio |
Analysis | Sell Low Put Strike |
Sell Low Put Bid |
Sell Low Put Ask |
Buy ATM 1× Call 1× Put Strike |
Buy ATM Put Bid |
Buy ATM Put Ask |
Buy ATM Call Bid |
Buy ATM Call Ask |
Sell High Call Strike |
Sell High Call Bid |
Sell High Call Ask |
Expiration | Max Gain The maximium gain possible for the selected strategy, given the current market price. |
% Max Gain Tha maximum gain possible for the selected strategy, expressed as a percentage of the max loss (amount at risk) |
Max Loss The maximium loss possible for the selected strategy, given the current market price. |
Breakeven Price Low The stock price at which the strategy breaks even, to the low side of the at-the-money strike. |
Breakeven Price High The stock price at which the strategy breaks even, to the high side of the at-the-money strike. |
Next Div Ex Date | Next Div Amt | Next Earnings | Underlying Hist Vol 20-Day |
Underlying Hist Vol 1-Year |
As Of Time | Moving Avg Indicator |
1-Day Support/Resistance |
% From 52-Wk Low | % From 52-Wk High | Option Order Flow (Net Delta) |
Holding Period Days The historical price return distribution uses intervals of this # of holding days |
# Obs |
% Positive Obs The % of historical price return observations in which the stock had a positive change in price |
% Negative Obs The % of historical price return observations in which the stock had a negative change in price |
Avg Move The average % move in the stock price for this historical price return distribution |
Median Move The median % move in the stock price for this historical price return distribution |
Avg Up Move The average % move in the stock price for this historical price return distribution, for only positive price movements |
Avg Down Move The average % move in the stock price for this historical price return distribution, for only negative price movements |
If Stock -1 StdDev at Exp The % return for the option spread if the options expire and the underlying price has declined one standard deviation from the current price. The standard deviation is calculated from the at-the-money straddle's implied move. |
If Avg Down Move The % return for the option spread if the stock price at expiration is equivalent to the current stock price plus the average negative % move of the historical price return distribution |
% Return if Stock Flat The % return for the option spread if the options expire with the same underlying price as the current underlying price, as a percentage of the total amount at risk |
If Avg Move The % return for the option spread if the stock price at expiration is equivalent to the current stock price plus the average % move of the historical price return distribution |
If Avg Up Move The % return for the option spread if the stock price at expiration is equivalent to the current stock price plus the average positive % move of the historical price return distribution |
If Stock +1 StdDev at Exp The % return for the option spread if the options expire and the underlying price has gained one standard deviation from the current price. The standard deviation is calculated from the at-the-money straddle's implied move. |
We compile an interval-based historical price return distribution for the underlying stock
If there are 20 days to go until expiration, we go back historically and look at intervals with a 20-day holding period for changes in stock price
If there is an earnings date coming up before expiration, we look at only those historical periods that included an earnings date
Similarly, if there is no earnings date before expiration, we look at only historical periods without earnings
We use those intervals to calculate a theoretical value for the spread based on those historical changes in stock price
Click on the Analysis link for a more detailed breakdown
Using the historical distribution, we calculate a theoretical value of the current spread based on these past changes in stock price.
To determine the edge, we take that value and compare it to the current market price of the spread.
Using the historical distribution, win rate represents the percentage of these historical observations where the current spread would have resulted in a positive return (given the observed change in stock price over the specified holding period).
This means that the end value of the spread would have been greater than the initial cost of the spread (Debit).
For the historical distribution, we've implemented a new model utilizing dynamic implied volatility ranges to narrow results around the symbol's current volatility environment. The implied volatility (IV30) is recorded at the start of each historical interval. We only select the 50% of historical observations where the IV30 at the time of the observation is the closest to the current IV30 -- 25% above and 25% below.
This way, if the current IV30 is exceptionally high or exceptionally low, we are focusing only on other historical observations that showed similar volatility.
We only utilize this method if we can ensure at least 16 observations. Otherwise, we continue to use all historical observations, as was the case prior to this method being applied.
Note: E indicates earnings within expiration
Tip: Click on the Expiration link to go directly to the option chain