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#433 - Why Enter Uneven Or Skewed Iron Butterflies?: Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “Why enter uneven or skewed iron butterflies?” There's probably two reasons why you would want to enter an...

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Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “Why enter uneven or skewed iron butterflies?” There's probably two reasons why you would want to enter an uneven or skewed iron butterfly. The first reason why you might enter one of these is because you have some sort of expectation that the market is more likely to go in one direction versus the other. For example, if you thought that a stock had a higher chance of moving up after a move down, then you might enter a skewed iron butterfly that reduces some of the upside risk should the stock actually move up from the price point that it's at right now. Again, one of the reasons why you could enter one of these skewed positions is basically the assumption of where the underlying security is going to go after your trade entry. Maybe you have some technicals that you’re going to use. Maybe you have some sort of charting patterns that you see developing. Well, whatever the case is, you have this assumption that the stock is going to move maybe in one direction at a greater likelihood than the other direction and so, you’d create a skewed iron butterfly for that scenario. Another scenario or the second scenario where you might use an uneven or skewed iron butterfly is just purely because of pricing and this is something that I see often with the trades that I make here at Option Alpha, is that we end up generating or building skewed iron butterflies not necessarily because we think that the stock is going to move up or down or has a higher propensity to move up or down. We’re pretty much neutral traders across the board, but because of the option pricing on one side or the other, suggest or just basically allows us to make a more narrow spread on one side. What do I mean by this? Well, let me give you an example. Let's say a stock is trading at $100 and we sell the at the money strikes to create this center of our iron butterfly position. We sell the 100 strike call and the 100 strike put. Well, if we are looking at this stock that actually has had a huge move lower or maybe has increased implied volatility, we might find that there's a lot of put skew in this particular underlying. In order for us to buy some sort of cheap long option protection on the put side, we might have to go out say $10. We buy the 90 strike puts for say $1 or $.10, some low amount to buy those options. Well, there's a lot of put skew because the stock is going down, but that doesn't mean that there's a lot of activity and volume on the call side. When we look at option pricing on the call side, what we might find is that if we go out just $5 on the call side, we end up seeing that it's the same price as going out $10 on the put side. And so, this might again, lead us to maybe generating a skewed iron butterfly where we buy the 90 strike puts, but on the call side, we only buy the 105 strike call options because going out to the 110 strike call options could be effectively the same price as the 105 strike call options, so why would we add an additional $5 of risk on the call side for exactly the same option premium? We’re not getting any benefit necessarily by going further out in strike and reducing the option premium. We see this a lot, actually. In fact, during low implied volatility markets, we see this actually more so than high implied volatility markets where the skew pricing on the call side suggest that we don't have to go out that for on the call side to buy very cheap protection. I always tell people – When you’re building iron butterflies, don't just default to the same spread width on either side. That's a good starting point for sure, but use some rational logic and reasoning to look at the option pricing on the call side or even on the put side and ask yourself – Where can I get the best covered position on this iron butterfly? If I need to make a skewed position and generate a skewed or uneven iron butterfl

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