Butterfly

The “Butterfly” plot type presents a spread between the IV of OTM options and the IV of ATM options. Barchart for Excel classifies the butterfly spread as long one OTM call and one OTM put (stangle) and short one ATM call and one ATM put (straddle). Whereas risk reversals are generally used to measure slope/skewness, butterfly spreads measure curvature/kurtosis. Kurtosis measures the extreme ‘tails' and their deviation from the normal distribution.

Open

Enter in a US or Canadian equity ticker or index symbol in the search for symbol box or used the symbol browser tree to search for your desired instrument. Note, IV Index data is only available for US and Canadian stocks and indexes that have listed options. Once the underlying is selected you will see the ticker display in the right side of the dialogue. To remove the symbol, simply click the 'x' to the right of the ticker.

Open

(Tip: When using the symbol tree, the Stocks → By Exchange, Index, Sector etc. branches have ‘Options’ leaves that only display underlying securities that have listed options)

One the underlying symbol is selected, you can now opt to plot the Butterfly using either maturity or expiration via the tabs found below.

By Maturity

Using ‘By Maturity', you can plot any of the virtual option period's current and historical butterflies by delta. The default is set to the 30 day maturity using the 25 delta.

By clicking in either the ‘VI’ (volatility index) or the ‘Delta’ boxes you can create a butterfly and then clicking on the '+' button to add it as a new instrument to be plotted.

You can remove the default butterfly or any newly created ones by clicking on the butterfly name (green box containing the maturity and delta).

Once the desired butterfly(s) have been created, you can now select whether to overlay the total options volume, underlying last or no additional indicators.

Once all parameters are set, click insert and view the butterfly(s) plotted in Excel. Below is the AAPL 30 day 15 delta butterfly.

Volatility Forecasting

As mentioned previously, kurtosis is a measure of the combined weight of a distribution's tails (OTM call and OTM put or ‘wings’) relative to the center of the distribution (ATM straddle or ‘body’). Butterflies can be used as barometer for understanding tail risk, or how frequently "infrequent" market events participants are pricing in the option market. Underlyings with high kurtosis tend to have a distinct peak near the mean and then decline rapidly and have heavy tails. Data sets with low kurtosis tend to have a flat top near the mean rather than a sharp peak. In short, the higher the Butterfly spreads are priced in terms of IV, the more ‘peaked’ is your implied volatility curve and thus a potential chance of a tail event.