Option Calculators and Stock Screeners
Symbol Lookup

chapter5/7 butterflies condors and wingspreads

Chapter 5

Butterflies Condors and Wingspreads

A butterfly is a three-leg strategy using either puts or calls consisting of one long contract with a lower strike, two short contract with a middle strike and one long contract of a higher strike. A butterfly is either all calls or all puts. The objective of the butterfly is to reap a high premium from the contracts at the middle strike while protecting against loss due to a major price swing by buying the outer contracts. The middle contracts are usually close to the money, while a good butterfly reaps high premium from the middle strike while buying the outer strikes cheaply.

Butterflies can be expensive, since three positions must be entered. The cost of a long butterfly is the cost of the outer legs minus the proceeds from the inner leg. The return on a butterfly peaks when the price of the underlying is equal to the middle strike price. Hence, purchasing a butterfly is neither bearish or bullish, the position will profit in a flat market. A good butterfly has a greater potential for profit than loss. The return bottoms out whenever the underlying price moves beyond the out strikes.

The butterfly has a similar P&L to a short straddle, with insurance against large moves in the underlying. The cost of the insurance will reduce the potential profit.


Data Provided by HistoricalOptionData.com
Optionistics is not a registered investment advisor or broker-dealer. We do not make recommendations as to particular securities or derivative instruments, and do not advocate the purchase or sale of any security or investment by you or any other individual. By continuing to use this site, you agree to read and abide by the full disclaimer.