How do you calculate butterfly spread?

What Is a Butterfly Spread?

1. The basic setup.
2. Maximum gain: difference between middle and lower strike prices minus net debit.
3. Maximum loss: net debit.
4. Breakeven: higher strike minus net debit or lower strike plus net debit.

Can you lose money on a butterfly spread?

Long options, therefore, rise in price and make money when volatility rises, and short options rise in price and lose money when volatility rises. Long butterfly spreads with calls have a negative vega. This means that the price of a long butterfly spread falls when volatility rises (and the spread loses money).

Is a butterfly spread bullish?

The bull butterfly spread is a very effective trading strategy if you can accurately predict what price a security is going to increase to, and it has a low upfront cost and limited loss. However, although the returns are good when your forecast is accurate, it does only generate a return within a fairly tight range.

What is a butterfly put spread?

1.20. A short butterfly spread with puts is a three-part strategy that is created by selling one put at a higher strike price, buying two puts with a lower strike price and selling one put with an even lower strike price. All puts have the same expiration date, and the strike prices are equidistant.

Is butterfly strategy good?

Finally, with a well-positioned OTM butterfly spread, a trader can enjoy a high probability of profit by virtue of having a relatively wide profit range between the upper and lower breakeven prices. In the wide spectrum of trading strategies, not many offer all three of these advantages.

Should you let a butterfly spread expire?

You can let out-of-the-money options simply expire out-of-the-money. There can be trouble ahead if you do not close out your butterfly positions before expiration. Any legs of a spread which are in-the-money at expiration can be exercised. The lesson: close out all in-the-money legs before expiration.

Can I let my butterfly spread expire?

You can let out-of-the-money options simply expire out-of-the-money. There can be trouble ahead if you do not close out your butterfly positions before expiration. Any legs of a spread which are in-the-money at expiration can be exercised.

What happens if you let a butterfly expire?

As this is a Call Butterfly, if the stock closed at expiry lower than the lowest strike price in the fly, all legs would expire OTM and worthless. You would lose the debit you paid for the fly. If the stock closed at expiry higher than the highest strike price in the fly, all legs would expire OTM and worthless.

What is the definition of a butterfly spread?

A butterfly spread is an options 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.

How many options are used in a butterfly spread?

These spreads, involving either four calls or four puts are intended as a market-neutral strategy and pay off the most if the underlying does not move prior to option expiration. There are multiple butterfly spreads, all using four options. All butterfly spreads use three different strike prices.

Is the butterfly spread a bull or bear strategy?

The butterfly spread is a neutral strategy that is a combination of a bull spread and a bear spread. It is a limited profit, limited risk options strategy. There are 3 striking prices involved in a butterfly spread and it can be constructed using calls or puts.

Can a butterfly spread be sold out of the money?

Another important point: the in-the-money and out-of-the-money options must be equidistant in strike price from the at-the-money option. For example, if you buy two $60 at-the-money call options for a short spread, then you can keep the butterfly in balance by selling the $55 in-the-money call option and $65 out-of-the money call option.