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equanimity
Topic Author
Posts: 29
Joined: April 30th, 2013, 2:54 am

### Butterfly Terminology

In cash fixed income, when "buying the butterfly", are you long the body and short the wings?  Or, are you short the body and long wings when "buying the butterfly"?  Thanks!

outrun
Posts: 4573
Joined: April 29th, 2016, 1:40 pm

### Re: Butterfly Terminology

When you buy the butterfly the payoff at expiration is positive or zero, a triangle.

Since the payoff at expiration is positive in some regions -and never negative- you can expect that you have to pay for it now, hence it's like buying.

equanimity
Topic Author
Posts: 29
Joined: April 30th, 2013, 2:54 am

### Re: Butterfly Terminology

Thanks @outrun.

On the desk, you hear "... long the 2s / 5s / 10s butterfly".  Which of the following does that mean?

a) short 2s / long 5s / short 10s
b) long 2s / short 5s / long 10s

outrun
Posts: 4573
Joined: April 29th, 2016, 1:40 pm

### Re: Butterfly Terminology

b)
Do you know how to draw payoff diagrams?

equanimity
Topic Author
Posts: 29
Joined: April 30th, 2013, 2:54 am

### Re: Butterfly Terminology

@outrun - I'm not 100% clear what you mean by "... at expiration, the payoff..."

The example I provided was cash bonds (not options).  Does that matter?  Can we use the case of the 2-year / 5-year / 10-year butterfly in U.S. Treasuries?

outrun
Posts: 4573
Joined: April 29th, 2016, 1:40 pm

### Re: Butterfly Terminology

Ah! I thought it was options! I don't know nothing about bond butterflies.

mtsm
Posts: 352
Joined: July 28th, 2010, 1:40 pm

### Re: Butterfly Terminology

long the cash fly ~ short the belly, long the wings.
long the swap fly ~ pay the belly, receive the wings

check me on this if I am wrong please.

In rates it is good to think in terms of rates and talk in terms of bonds. Just about for everything including delta and options skew even (on certain desks).

Only quants and pure "interbank derivatives" people will talk in terms of rates. If you work in a place that is somewhat close to the actual underlying rates instrument, which is a bond, it's custom the way I described.

A side effect of this is that for example derivatives people refer to CMS spread options as "CMS spread options", but this is an unfortunate name, as a spread is typically referring a basis. A better name is "CMS curve option".

Martinghoul
Posts: 3256
Joined: July 18th, 2006, 5:49 am

### Re: Butterfly Terminology

Speaking for myself, there's really no convention and I still have to make sure to not confuse people when I talk about flies.

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