A three-legged curve trade, long one month, short two of the middle month and long a third, that isolates the curvature of the forward curve.
A fly is the spread of two spreads. Buy the March-June spread and sell the June-September spread and you are left long March, short two June, long September. The position is insensitive to a parallel shift in the whole curve and only makes money if the middle month cheapens or richens relative to its neighbours.
Flies are the favourite instrument of rates and energy curve traders because they strip out the two largest risk factors — level and slope — and leave the smallest one. Margin is tiny, so position sizes are large, which is where blow-ups come from.
Example: March 96.10, June 96.40, September 96.55 in a rate future. The March-June spread is -30 ticks, June-September is -15 ticks, so the fly is -15. If June richens by 4 ticks against both wings the fly moves to -23 and a short-fly position gains 8 ticks.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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