a vega for the spread. (Remember, short
options have short vegas.)
WHO REIGNS SUPREME?
With our butterfly, the long 140 and 150
calls each have 0.12 of vega for a total of
$0.24. But the two short calls at the 145
strike each have short 0.15 vega, for a total
of -$0.30. Add it up and it brings the butterfly’s vega to -0.06, because (0.24 +(-0.30)
= -0.06). And that means the butterfly will
likely lose $0.06 if vol goes up by one point.
Conversely, it will likely profit $0.06 if vol
drops by one point. Are you beginning to
see the power of this?
The calendar is a little different. When
you compare the same strike, vega may be
higher for options further out in time. With
the calendar, the long November 145 call
has 0.25 of vega, and the short October 145
call has -0.15 of vega. As a spread, the cal-
endar nets out with vega of 0.10—positive
vega, that is. So if vol goes up by one point,
assuming vols change by same number of
points in both expirations, the calendar will
likely profit $0.10. And if vol drops by one
point, the calendar will likely lose $0.10.
So, the calendar is a long-vega trade,
while the butterfly is a short-vega trade.
And your assessment of whether vol is
high or low, and whether it’s going to move
higher or lower, should help you choose
one strategy over another.
If implied vol is high, we can expect butterflies to be cheaper. And if vol drops, the
fly will likely profit, even though the spread
has two long options. That’s because the vega
of the at-the-money (ATM) option is larger
than the vega of options that are either
in the money (ITM)
or out of the money
Calendars, however, are going to be
more expensive in
a high-vol environment, where a drop
in vol can hurt your
trade. The long
option could lose
more value than
the short option
because it has a
bigger vega. So
overall, the calendar could lose value.
In general, low-vol environments are
often better suited for calendars. They can be
cheaper, and can profit if vol rises. Butterflies,
on the other hand, are often more expensive
and can lose profit potential if vol goes up.
MORE TO THINK ABOUT
With either strategy, don’t go into the trade
and expect the underlying stock to settle
exactly at the short strike on expiration day.
You may get lucky, but that’s a low-prob-ability expectation. Instead, consider
these strategies for stocks you think will
be range-bound, and not likely to stray far
from the short strike.
Another difference? Calendars are more
easily rolled out when expiration nears.
Of course, if you held an expiring butterfly
on a stock you felt was going to remain
stagnant, you could close that butterfly and
open another one in a different expiration.
But that’s trading potentially six different
strikes (three to close, three to open) with
transaction costs. In contrast, rolling a calendar on a stock you think isn’t going anywhere fast—that requires only rolling the
expiring strike out to a longer expiration.
ONLY TIME WILL TELL YOU WHETHER
the strategy you chose was the “right” one.
Calendars and butterflies are designed to
profit from time decay if the stock finishes
near the strike at
both might eventu-
ally lose their entire
value if the stock
moves far enough
away from the
strike. These strate-
gies are also closely
related in many of
their greeks. But
it’s their vega that
separates them into
can perform better
in different vol
Kevin Lund is not a representative of TD Ameritrade,
Inc. The material, views, and opinions expressed in
this article are solely those of the author and may
not be reflective of those held by TD Ameritrade, Inc.
For more on the risks of trading and trading
options, see page 37, #1– 2.
Rolling strategies can entail substantial transaction costs, including multiple commissions, which
may impact any potential return.
FIGURE 1: Risk graph of long 140/145/150 call
butterfly. The risk graph shows the areas of maximum profit and maximum loss—on both sides of the
middle strike. For illustrative purposes only.
FIGURE 2: Risk graph of long November/October
145 call calendar. The graph looks nearly identical
to the call butterfly, but notice how the graph is
curved, rather than flat, around the 140 and 150
strikes. For illustrative purposes only.
LONG CALL BU TTERFLY
145 call at expiration
LONG CALL CALENDAR
145 call at expiration
HOW TO PLACE
CALENDARS AND BUTTERFLIES
Once you get comfy with calendars and
butterfly spreads, you’re ready to place trades.
1. Start from the Trade page.
2. Enter a symbol.
3. Select calendar or butterfly: Right-click on
the ask/bid of the option you want to buy
or sell. From the menu, select Butterfly or
4. Adjust the order: Your order will be at the
bottom of the order entry section below the
option chain. Adjust the quantity, strikes,
5. Place the order: You have one last chance
to check the trade details before you click
the Send button.