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Butterfly (curve trade)

A three-leg curve trade on the belly of the curve against the two wings, expressing a view on curvature rather than direction or slope.

A 2s5s10s fly is buying or selling the 5-year against the 2-year and 10-year in DV01-weighted size, so both the parallel shift and much of the slope are hedged. What is left is whether the middle of the curve is rich or cheap.

The fly spread is quoted as 2 x belly yield minus the two wings. Traders use flies to trade the expected timing of the policy peak, since that is what bulges the belly.

Example: 2-year 4.50%, 5-year 4.15%, 10-year 4.30%. The fly is 2 x 4.15 - 4.50 - 4.30 = -0.50%, or -50 bp. If the belly cheapens 10 bp relative to the wings, the fly moves to -30 bp.

Related: humped-yield-curve, key-rate-duration, curve-steepener, dv01

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of an iron condor at expiryA flat profit plateau between the two sold strikes, falling away to a capped loss on each wing.Profit / loss per share0841001169095105110buy 90 putsell 105 callsell 95 putbuy 110 callMax profit 2 — the net creditMax loss 3Max loss 3Breakeven 93Breakeven 107Underlying price at expiry
Iron condor: payoff at expiry. Four strikes: the 2 credit is kept in full while the price finishes between 95 and 105, and is lost gradually outside the 93 and 107 breakevens. The bought 90 put and 110 call stop the loss at 3 on either wing.

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