March 20th, 2015, 3:44 pm
Imagine a continuous function y=f(x)If you measure y at two different x points one unit apart, the difference is an estimate of the slope: f(x2)-f(x1) If you measure y at three different points x1 x2 x3 one unit apart, the expression f(x1)-2*f(x2)+f(x3) is an estimate of the curvatureA Risk reversal is long one option and short another option at different strikes, so it is like case 1 aboveA Butterfly is long one option, short two options and long another option at three different strikes, so it is like case 2 above