Other Options Strategies

Butterfly Spread

A butterfly spread is the simultaneous purchase of one vertical spread and the sale of another vertical spread with both spreads sharing a common strike; having equal spread quantities; having the same series (calls or puts); and having the same expiration date.

Butterfly Spread

Limited Profit

Maximum Profit = Distance between the strike prices of the vertical spreads minus the purchase price

Maxium Value = Stock price closing between the two vertical spreads on expiration

Limited Loss

             Maximum Loss = Amount Paid for the Spread

Break-Even Points

2 break-even points

            The lower strike plus premium and the higher strike minus premium.

 Quiz

If you buy 100-105-110 call butterfly for $ 0.20 debit.

  1. What is the maxium profit of this butterfly spread?
  2. What is the maxium loss of this butterfly trade?
  3. What will you see the maxium value of butterfly
  4. What is the break-even points?

 Answer

  1. Maximum Profit is $ 4.80 Distance between strikes $5 – Purchase price $0.20= $4.8
  2. Maximum Loss is $20 per contract
  3. Maximum Profit only happen on expiration.
  4. Break even points are 100.20 ( 100 strike +0.20) and 109.80 ( 110 strike -0.20)