Understanding of different Multi-Legged Products (i.e. Spread, Calendar Spread, Butterfly, Cantor, Bundle)

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Imported from previous forum

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Hello,

I am looking to understanding how multi-legged products are similar and different from each other (i.e. specifically Spread, Calendar Spread, Butterfly, Cantor, and Bundle).

Below are some of my basic understanding of each.

Spread (i.e. generic spread product): Represents the simultaneous purchase and/or sale of two or more different but related instruments (legs).

Calendar Spread: This represents a standardized contract between two entities to simultaneously buy and sell the same underlying asset at the specified price on different pre-determined dates (i.e. different maturity months within the same year).

Butterfly: Consists of simultaneously buy and sell the same underlying asset at the specified price on different pre-determined dates for 3 legs. These three legs consist of the body and the wings. If buying, the nearest and furthest legs make up the wing as a BUY, while the body is the SELL, vice versa.

Condor: Spread between two adjacent calendar spreads. Simultaneous buy/sell order for one contract in the near expiration, sell/buy order for one contract in a future expiration, sell/buy order for one contract in a subsequent future delivery month, and buy/sell order for one contract with an even later expiration. The gaps between the months must be equal.

Bundle: This represents the purchase or sale of the same underlying asset with consecutive quarterly maturity months per block of 4 for a period of two or more years.

Questions:

  1. Let me know if the definitions are inline.
  2. How does one determine how many legs pertain to each type of Bundle (i.e. if a 2-year, 3-year, 4-year, 5-year, 10-year bundle, etc).
  3. Can one say that a Condor is an exact combination of two calendar spreads that would equate to four legs, while a Butterfly is a combination of two calendar spreads that is instead denoted as 3 legs?
  4. Does a Butterfly have to have equally distributed maturity months?
  5. I read that a Butterfly is essentially a “spread of calendar spreads”. What does that mean?

Sources:


http://www.cmegroup.com/confluence/display/EPICSANDBOX/Futures+Spreads#FuturesSpreads-Futures-Bundle(FB)
http://www.cqg.com/docs/ExchangeTradedStrategies.pdf
https://www.seasonalgo.com/condor-and-butterfly-spread

I would gladly appreciate the help.

Thanks,

Dwayne

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Hi Dwayne

The definitions of these terms (spread, calendar spread, butterfly cantor and bundle) are specific per asset class / industry / market.

For example, butterfly of listed derivatives (common in CME / Eurex / LIFFE…) have different definition to butterfly of IRS [interest rates swaps].

Moreover, each market will have its own conventions for each of its strategies.
For example, CME butterflies are ‘equally distributed maturity months’ yet, according to NYSE LIFFE “The gaps between the months do not have to be equal/ consecutive”

[https://www.cmegroup.com/confluence/display/EPICSANDBOX/Futures+Spreads#FuturesSpreads-Futures-Butterfly(BF)]
[http://www1.nyse.com/pdfs/recognised_strategies.pdf]

In some industries, butterflies contain 4 legs.

I’d suggest to learn the meaning of these terms separately for each market.