Draft:Dragonfly (options)

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Example payoff diagram of a long dragonfly spread: at expiry, the maximum profit is achieved if the underlying is at the middle strike, while losses are limited if the underlying is far from the middle strike.

A dragonfly spread is an options trading strategy that typically consists of two strangles for every one straddle (a 2:1 ratio).[1] The strategy is designed so that the vega exposures of the straddles and strangles offset, making the overall position vega-neutral.[1] This allows the trader to express a view on the kurtosis or shape of the implied volatility distribution while remaining neutral to changes in overall implied volatility.[2]

A long dragonfly spread earns its maximum profit when the underlying closes at the middle strike at expiry, but has limited losses if the underlying moves far above or below that strike.[1] The strategy can be constructed with either all calls or all puts, and all options have the same underlying and expiration date.[1]

Construction

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A long dragonfly spread can be built by buying two out-of-the-money strangles (same expiration, equidistant strikes above and below the at-the-money strike) and selling one at-the-money straddle (same expiration).

The reverse (i.e., selling two strangles and buying one straddle) produces a short dragonfly spread.[1] The distances between strikes in each strangle are typically equal, and the total position is arranged so that the combined vega of the two strangles matches the vega of the one straddle in magnitude but opposite in sign (achieving vega-neutrality).[1][2]

Characteristics and Payoff

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At expiration, the payoff profile of a dragonfly spread has a peaked shape centered around the middle strike (similar in concept to a butterfly or condor spread). For a long dragonfly (long strangles and short straddle), the maximum profit is generally realized if the underlying closes exactly at the middle strike price on expiration. In that scenario, all of the options in the spread expire worthless: the short straddle (at the middle strike price) expires at the money with no intrinsic value, and the two long strangles (with strikes at the lower strike price and the upper strike price) expire out of the money. The long dragonfly is typically opened for a net debit, so if all options expire worthless, the trader would actually lose that small initial cost. However, in many cases the short straddle premium received can outweigh the cost of the two strangles, resulting in a net credit position.[3] In such cases (net credit), having all options expire worthless means the trader keeps the net credit as profit, which is maximized when the underlying ends at the middle strike price. In summary, a long dragonfly tends to profit if the underlying price remains very close to the middle strike through expiration (similar to a short straddle but with protection at the extremes).

Relation to other strategies

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The dragonfly spread can be viewed as a specialized form of a butterfly spread in which the “wings” are replaced by strangles, creating a narrower profit peak and a more limited downside risk.[1][3] It is also related to the condor spread, but with a construction emphasizing offsetting vega rather than simply widening the profit range.

See also

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References

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  1. ^ a b c d e f g Natenberg, Sheldon (2015). "Chapter 24". Option Volatility and Pricing: Advanced Trading Strategies and Techniques (Second ed.). New York: McGraw-Hill Education. ISBN 9780071818780.
  2. ^ a b "Options, Greeks and P&L Decomposition (Part 3)". Quant Next. August 28, 2023. Retrieved August 15, 2025. ...the vega risk can be managed by adjusting the long/short quantities...
  3. ^ a b Stubbs, Casey (February 18, 2021). "ThetaTrader and the Six-Legged Dragonfly Strategy (interview with Erik Gebhard)". Trading Strategy Guides. Retrieved August 15, 2025. The extra two legs of the dragonfly strategy are additional insurance that allows the trade to behave differently than a condor... The extra options act as a risk buffer.

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