Butterfly Spread Options Trading Strategy
Butterfly spread options trading strategy is one of the multi legged options trading strategies in which a trader deals with options for four different trades at same expiration date for same underlying product. It is one of the complex options trading strategies in which the trader profit when the price of underlying product remains around the original price. Butterfly spread options strategy is a blending of bull and bear spread in one contract.
Butterfly spread options include lone and short call and put options. All butterfly options are limited profit limited risk strategies. In long call options there are three legs with 4 possible trades, two long calls for low and high strike prices and two short calls for middle strike prices. The maximum profit is the intrinsic value of lower strike call at the time of expiration deducted by initial debt and commissions.
In long put butterfly spreads puts are employed in place of calls. Short butterfly spread strategies are employed when volatility is expected in underlying product price. They include writing of one lower and higher sticking calls/puts and buying two at-the-money calls/puts. The commissions for butterfly options may be some what high as there is 4 trades involved in a single strategy.
Butterfly spread options include lone and short call and put options. All butterfly options are limited profit limited risk strategies. In long call options there are three legs with 4 possible trades, two long calls for low and high strike prices and two short calls for middle strike prices. The maximum profit is the intrinsic value of lower strike call at the time of expiration deducted by initial debt and commissions.
In long put butterfly spreads puts are employed in place of calls. Short butterfly spread strategies are employed when volatility is expected in underlying product price. They include writing of one lower and higher sticking calls/puts and buying two at-the-money calls/puts. The commissions for butterfly options may be some what high as there is 4 trades involved in a single strategy.
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