Butterfly Spread

A strategy including four options with three strike prices. For a call strategy, an investor can buy one call at the lowest price, sell two calls at the middle strike price and buy one call at the highest strike price.
A butterfly spread put strategy can be developed by buying one put at the highest price, selling two at the middle price and buying one put at the lowest price. Befuddled yet?
Due to the various positions, both risk and return are to some degree limited. What's not limited is the amount of commissions you'll pay your broker on eight options transactions, making butterfly spreads a strategy that ought to be stayed away from by most individual investors.

Features

• These spreads utilize four options and three different strike prices.
• Butterfly spreads pay off the most in the event that the underlying asset doesn't move before the option lapses.
• The upper and lower strike prices are equivalent separation from the middle, or at-the-cash, strike price.
• These are neutral strategies that accompany a fixed risk and capped profits and losses.
• A butterfly spread is an options strategy that consolidates both bull and bear spreads.

FAQ

How Is a Long Call Butterfly Spread Constructed?

The long call butterfly spread is made by buying a one in-the-cash call option with a low strike price, composing (selling) two at-the-cash call options, and buying one out-of-the-cash call option with a higher strike price. Net debt is made when you enter the trade.The maximum profit is accomplished on the off chance that the price of the underlying asset at expiration is equivalent to the written calls. The max profit is equivalent to the strike of the written option, less the strike of the lower call, premiums, and commissions paid. The maximum loss is the initial cost of the premiums paid, plus commissions.

How Is a Long Put Butterfly Spread Constructed?

The long put butterfly spread is made by buying one out-of-the-cash put option with a low strike price, selling (composing) two at-the-cash put options, and buying one in-the-cash put option with a higher strike price. Net debt is made while entering the position. Like the long call butterfly, this position has a maximum profit when the underlying asset stays at the strike price of the middle options.The maximum profit is equivalent to the higher strike price minus the strike of the sold put, less the premium paid. The maximum loss of the trade is limited to the initial premiums and commissions paid.

What Are the Characteristics of a Butterfly Spread?

Butterfly spreads utilize four option contracts with a similar expiration however three different strike prices. A higher strike price, an at-the-cash strike price, and a lower strike price. The options with the higher and lower strike prices are a similar separation from the at-the-cash options. Each type of butterfly has a maximum profit and a maximum loss.