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How the 25-Delta FX Butterfly Uses Call, Put, and ATM Volatility

Article Quant Q&A · Author: Karry
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Summary

The document asks why an FX 25-delta butterfly is commonly expressed using the average of 25-delta call and put volatilities adjusted by the at-the-money straddle volatility. It also asks what the 25-delta label means in this construction, placing the focus on interpreting delta-based option quotes and the butterfly quote convention.

The text contains no answer, worked calculation, market data, or evidence for the formula. It is a concise question that identifies two concepts a reader would need to clarify: how delta identifies an option quote and how the butterfly quote isolates smile curvature relative to at-the-money volatility. It does not specify a market convention or discuss alternative definitions, so those details cannot be inferred from the document alone.

Key ideas

  • The document asks how a 25-delta butterfly quote combines call, put, and at-the-money volatility.
  • The 25-delta label refers to the delta-based selection of call and put quotes.
  • The text does not explain the formula or supply a worked example.
  • Market quote conventions would need to be specified to assess the construction precisely.

Tags

ForexOptionsVolatilityDerivatives pricing
Full text
# construction of 25 delta butterfly


# construction of 25 delta butterfly












Could anyone explain why the 25-delta butterfly strategy is constructed by 0.5*(25-delta call + 25-delta put) - ATM straddle?

Especially, what the term "25-delta" represents in "25-delta butterfly strategy"?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.