I’ve been experimenting with options structures and built a setup combining a long straddle with short OTM call and put wings, essentially using vertical spreads to offset some of the straddle’s downside. I haven’t found much discussion on this exact structure. Is this because it’s overleveraged, not allowed, or simply inefficient compared to other existing strategies? Is there a better or more standard way to achieve this kind of payoff profile?
Posted by Fendifrenchie
2 Comments
the only reason to hedge against your original position is if you gain theta or minimize negative gamma
What you built is just an iron butterfly, long ATM straddle plus short OTM wings is the textbook definition of it and it is one of the most widely traded structures in options. The reason you are not finding discussion on your specific framing is that most traders approach it from the short side, selling the ATM straddle and buying the wings for protection, which is the more common premium selling setup. The long version you described profits from a big move but the wings cap your max gain, so you are essentially paying for a defined risk straddle which makes sense if you want long vol exposure without unlimited downside on the premium decay.