Vous êtes sur la page 1sur 9

Butterfly Spread

Strategy
Presented by
Varshini Chinthalapani
Butterfly spread:
• A butterfly spread is an option strategy combining bull and bear
spreads, with a fixed risk and capped profit.
• Butterfly spreads use four option contracts with the same expiration
but three different strike prices.
• A higher strike price, an at-the-money strike price, and a lower strike
price.
• The options with the higher and lower strike prices are the same
distance from the at-the-money options.
• If the at-the-month options have a strike price of $60, the upper and
lower options should have strike prices equal dollar amounts above
and below $60. At $55 and $65, for example, as these strikes are both
$5 away from $60.
Contd…
• Puts or calls can be used for a butterfly spread. Combining the
options in various ways will create different types of butterfly
spreads, each designed to either profit from volatility or low volatility.
• The four options are
 Long call butterfly
 Short call butterfly
 Long put butterfly
 Short put butterfly
Long Call Butterfly Spread
• The long butterfly call spread is created by buying one in-the-money
call option with a low strike price, writing two at-the-money call
options, and buying one out-of-the-money call option with a higher
strike price. A net debit is created when entering the trade.

• The maximum profit is achieved if the price of the underlying at


expiration is the same as the written calls. The max profit is equal to
the strike of the written option, less the strike of the lower call, less
premiums and commissions paid. The maximum loss is the initial cost
of the premiums paid, plus commissions.
Short Call Butterfly Spread
• The short butterfly spread is created by selling one in-the-money call
option with a lower strike price, buying two at-the-money call
options, and selling an out-of-the-money call option at a higher strike
price. A net credit is created when entering the position. This position
maximizes its profit if the price of the underlying is above or the
upper strike or below the lower strike at expiry.

• The maximum profit is equal to the initial premium received, less


commissions. The maximum loss is the strike price of the bought call
minus the lower strike price, less the premiums received.
Long Put Butterfly Spread
• The long put butterfly spread is created by buying one put with a
lower strike price, selling two at-the-money puts, and buying a put
with a higher strike price. A net debit is created when entering the
position. Like the long call butterfly, this position has a maximum
profit when the underlying stays at the strike price of the middle
options.

• The maximum profit is equal 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.
Short Put Butterfly Spread
• The short put butterfly spread is created by writing one out-of-the-
money put option with a low strike price, buying two at-the-money
puts, and writing an in-the-money put option at a higher strike price.
This strategy realizes its maximum profit if the price of the underlying
is above the upper strike or below the lower strike price at expiration.

• The maximum profit for the strategy is the premiums received. The
maximum loss is the higher strike price minus the strike of the bought
put, less the premiums received.
Example of a Long Call Butterfly Spread
• An investor believes that Verizon stock, currently trading at $60 will
not move significantly over the next several months. They choose to
implement a long call butterfly spread to potentially profit if the price
stays where it is.

• An investor writes two call options on Verizon at a strike price of $60,


and also buys two additional calls at $55 and $65.
Contd…
• In this scenario, an investor would make the maximum profit if Verizon
stock is priced at $60 at expiration. If Verizon is below $55 at expiration, or
above $65, the investor would realize their maximum loss, which would be
the cost of buying the two wing call options (the higher and lower strike)
reduced by the proceeds of selling the two middle strike options.

• If the underlying asset is priced between $55 and $65, a loss or profit may
occur. The amount of premium paid to enter the position is key. Assume
that it costs $2.50 to enter the position. Based on that, if Verizon is priced
anywhere below $60 minus $2.50, the position would experience a loss.
The same holds true if the underlying asset were priced at $60 plus $2.50
at expiration. In this scenario, the position would profit if the underlying
asset is priced anywhere between $57.50 and $62.50 at expiration.