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A short butterfly position will make profit if the future volatility is higher than the implied volatility. A short butterfly options strategy consists of the same options as a long butterfly. However now the middle strike option position is a long position and the upper and lower strike option positions are short.
The iron butterfly is a special case of an iron condor (see above) where the strike price for the bull put credit spread and the bear call credit spread are the same. Ideally, the margin for the iron butterfly is the maximum of the bull put and bear call spreads, but some brokers require a cumulative margin for the bull put and the bear call.
option-adjusted spread, or the extra yield demanded by the security holder to compensate for the mortgage repayment option; current-coupon spread; volatilities; convexity; cost of carry; While all these factors can be important in accounting for changes in MBS returns, in practice a particular user may only select a subset.
In finance, a spread option is a type of option where the payoff is based on the difference in price between two underlying assets. For example, the two assets could be crude oil and heating oil; trading such an option might be of interest to oil refineries, whose profits are a function of the difference between these two prices.
In finance an iron butterfly, also known as the ironfly, is the name of an advanced, neutral-outlook, options trading strategy that involves buying and holding four different options at three different strike prices.
Profit diagram of a box spread. It is a combination of positions with a riskless payoff. In options trading, a box spread is a combination of positions that has a certain (i.e., riskless) payoff, considered to be simply "delta neutral interest rate position".
The formula is quickly proven by reducing the situation to one where we can apply the Black-Scholes formula. First, consider both assets as priced in units of S 2 (this is called 'using S 2 as numeraire'); this means that a unit of the first asset now is worth S 1 /S 2 units of the second asset, and a unit of the second asset is worth 1.
As above, the PDE is expressed in a discretized form, using finite differences, and the evolution in the option price is then modelled using a lattice with corresponding dimensions: time runs from 0 to maturity; and price runs from 0 to a "high" value, such that the option is deeply in or out of the money.