Difference between long butterfly and Short straddle between, difference, understand, infinite, butterfly

pimpineasy

Hi,
I am aware of difference between long butterfly and short straddle in a way that straddle will produce infinite loss where as butterfly will have limited loss but I can't understand why would someone go for straddle instead of butterfly. Why would somone want to go for infinite loss against limited one/

zwjy

yeah, the confidence level is money, it is the probability you input into calculating the option value

strikethree

Straddles are actually one of the most important instruments for option-traders: say I quote a bid for a customer selling a swaption. I would than do delta with swaps-desk and (as i'm long vega from the swaption) sell atm-straddles to hedge my vega. Atm-straddles have zero delta and are therefore THE instrument to handle vega. You could also handle the volatility with mbs, bonds with optionality, etc with straddles...

pennyless

short straddle provides positive cash flow upfront. Long butterfly requires outflow of cash at initiation.