risk reversal and butterfly bid ask quotes

koolad · March 19th, 2014, 3:23 pm

How do I go about calculating or rather justifying 25d RR and 25d Butterfly Bid-Ask quotes from 25d Call and 25d Put quotes or vice versa?Market data : ask bidBF 0.5 0.15RR -1.96 -2.66ATM 9.85 9.55C 9.22 8.52P 11.53 10.83RR seems to bid call-mid put and ask call-mid put...But is it always true?Butterfly quotes are big troublemakers.. PS:It seems that this question has been asked a couple of times..But I just cant use the conclusions drawn there in this case..

daveangel · March 19th, 2014, 3:45 pm

Not sure I can completely answer your question but here goes.I am assuming that these are vols. So,mid ATM vol = 9.7mid Call vol = 8.87mid put vol = 11.18RR = call - put = -2.31BF = (call + put - 2* atm)/2 = 0.325this should be the mids of RR and BF quotes.

koolad · March 19th, 2014, 3:51 pm

RR bid=call bid-put mid8.52-11.18=-2.66RR ask=call ask-put mid9.22-11.18=-1.96Which seems to be in sync with the market data..

koolad · March 19th, 2014, 4:05 pm

and with your thing as well..but how do I spread your mids?

daveangel · March 19th, 2014, 6:18 pm

the bid ask spread on at ATM looks like 0.3 - if you use that thenfor RR you should get -2.61 and -2 and half of that for the BF gives you 0.475 and 0.175

koolad · March 20th, 2014, 1:57 am

doesnt always work..Thanks a ton..