Here we are !


I - The situation :

No big moves on EUR / USD , the spot is around 1.3150




II - The strategy :

I had choosen in a arbitrary way a bearish direction on the EUR / USD, that the dollar should strengthen against the EUR.
The butterfly spread is built as it follows:

DEC 28 Expiry:
- The purchase of 300000 calls struck at 1.34 for $0.0230 each ( Implied Volatility 16.59% ) hence a debit of $ 6900
- The short selling of 600000 calls struck at 1.32 for 0.0169 each ( Implied Volatility 16.72% ) hence a credit of $ 10140
- The purchase of 300000 calls struck at 1.30 for $ 0.0138 ( Implied Volatility 17.86% ) hence a debit of $ 4140

Global debit : $ 900



III - Pricing :

For a spot at 1.3150




300000 1.34 puts are worth 0.0256 each ( Implied Volatility de 9.51% ) hence $ 7680 ( $ + 780 )
600000 1.32 puts are worth 0.0103 each ( Implied Volatility 10.36% ) thus $ 6180 ( $ + 3960 )
300000 1.30 puts are worth 0.0015 each ( Implied Volatility 8.84% ) hence $ 450 ( $ - 3690 )

Global P&L :+ 780 + 3960 - 3690 = $ + 1050



IV - Graph :




Adjustment Pricing :
Our adjustment was :

Selling 300000 dec 1.34 calls for $ 7980
Buying 200000 dec 1.36 calls at 0.0317 for $ 6340.

It's now worth :
- 300000 1.34 puts at 0.0256 thus $ 7680 (- 840 )
- 200000 1.36 puts at 0.0449 thus $ 8980 ( + 2640)

An additional profit of $ + 1800, hence a global profit of $ 2850.





See you next week !


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Gilles