Greeks and Wing Spreads
Much of this chapter has been spent on how wing spreads perform if held
until expiration, and little has been said of option greeks and their role in
wing spreads. Greeks do come into play with butterflies and condors but not
necessarily the same way they do with other types of option trades.
The vegas on these types of spreads are smaller than they are on many
other types of strategies. For a typical nonprofessional trader, it’s hard to
trade implied volatility with condors or butterflies. The collective
commissions on the four legs, as well as margin and capital considerations,
put these out of reach for active trading. Professional traders and retail
traders subject to portfolio margining are better equipped for volatility
trading with these spreads.
The true strength of wing spreads, however, is in looking at them as
break-even analysis trades much like vertical spreads. The trade is a winner
if it is on the correct side of the break-even price. Wing spreads, however,
are a combination of two vertical spreads, so there are two break-even
prices. One of the verticals is guaranteed to be a winner. The stock can be
either higher or lower at expiration—not both. In some cases, both verticals
can be winners.
Consider an iron condor. Instead of reaping one premium from selling one
OTM call credit spread, iron condor sellers double dip by additionally
selling an OTM put credit spread. They collect a double credit, but only one
of the credit spreads can be a loser at expiration. The trader, however, does
have to worry about both directions independently.
There are two ways for greeks and volatility analysis to help traders trade
wing spreads. One of them involves using delta and theta as tools to trade a
directional spread. The other uses implied volatility in strike selection
decisions.