Butterfly Spread

Butterfly Spread

A butterfly spread is an Options trading strategy that involves the simultaNeous buying and selling of Options with three different Strike Prices, all with the same expiration date. It aims to profit from minimal price movement in the underlying Asset and can be constructed using either calls or puts.

Types of Butterfly Spreads

• Call Butterfly Spread: Involves buying one call option at a lower Strike Price, selling two call Options at a middle Strike Price, and buying one call option at a higher Strike Price.
• Put Butterfly Spread: Involves buying one put option at a lower Strike Price, selling two put Options at a middle Strike Price, and buying one put option at a higher Strike Price.

Example

Consider a Stock trading at $100:

• Buy 1 Call at $95 (cost: $5)
• Sell 2 Calls at $100 (cost: $7 each, total: $14)
• Buy 1 Call at $105 (cost: $3)

Net Cost: $5 – $14 + $3 = -$6 (you receive $6)

Case Scenario

If the Stock price at expiration is $100, the position would generate maximum profit. If it moves significantly away from $100, the potential losses would be limited to the initial cost of establishing the spread.