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Butterfly Spread

 Profile Version / Simplified Version / Comprehensive Version


Purpose Of Butterfly Spread
1. To Profit From Stagnant Stocks


Expectations Of Butterfly Spread
Stagnant


Type Of Spread
Debit Spread


How To Use Butterfly Spread?
There are 3 option trades to establish for this strategy : 1. Buy To Open X number of In The Money Call / Put Options. 2. Buy To Open X number of Out Of The Money Call / Put Options. 3. Sell To Open 2X number of At The Money Call / Put Options. 		Long Butterfly Spread Risk Graph Learn How To Read This Chart

Buy ITM Call / Put Option + Buy OTM Call / Put Option + Sell 2 X ATM Call / Put Option


Profit Potential of Butterfly Spread :
Butterfly spreads achieve their maximum profit potential at expiration if the price of the underlying stock is equal to the middle strike price.


Profit Calculation of Butterfly Spread:
Maximum Profit = (Middle Strike - Lower Strike - Net Debit) x 100
Profit % = (Max Profit - Net Debit) / Net Debit

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Risk / Reward of Butterfly Spread:
Upside Maximum Profit: Limited
Maximum Loss: Limited to net debit paid


Break Even Point (Profitable Range) of Butterfly Spread:
1. Lower Breakeven Point : Net Debit + Lower Strike Price
And
2. Upper Breakeven Point : Higher Strike Price - Net Debit


Advantages Of Butterfly Spread:

  • Large profit percentage due to low cost involve in executing the position.

  • Limited risk should the underlying asset rally or ditch unexpectedly. (unlike the Short Straddle)

  • Maximum loss and profits are predictable.


    Disadvantages Of Butterfly Spread:

  • Larger commissions involved than simpler strategies with lesser trades.

  • Not a strategy that traders with low trading levels can execute.


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    What Is A Condor Spread?
    What Is A Covered Call?
    What Is An Iron Butterfly Spread?
    What Is An Iron Condor Spread?
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    What Is A Short Strangle?
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