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Long Butterfly, Short Butterfly |
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Long Butterfly
This is one of the few positions that are advantageous in a long-term option series. Traders buy the “wings” on either side of the position and sell the “body”. The buyer of the wings purchases one unit each of two outside strikes and sells two units of the inside strikes. As a combination of a bull and bear spread, this strategy normally gives a maximum returns and maximum loss. The buyer of the wings earns maximum profit if the underlying settles at the middle strike. The buyer of the wings' maximum loss is limited to the premium paid. The seller of the wings realizes maximum profit (equal to the premium received upfront) if the underlying settles outside of the range of the strikes. The seller's maximum loss is capped at the value of the difference between the middle strike and the outside strike less the premium received. This is a very conservative spread. Maximum profit growth is at the apex of the ‘body’, but if the second wing of the butterfly is not paralleling the first one, the option should be liquidated.
Short Butterfly
This strategy should be used if the trader is somewhat convinced that the market will be volatile. This trade involves selling 1 call with lower strike price, buy 2 calls with middle strike price and sell 1 call with higher strike price. This trade realizes its maximum profit when the underlying moves outside the range of the strikes. The upside is that it is limited to the initial credit received. Its downside is that it is Limited to the difference between the lower and middle strikes minus the initial spread credit. Potential profit occurs when the stock price is below the lower break-even point or above the upper break-even point. The lower break-even point equals to the lowest strike price plus net premium received and the upper break-even point equals to the highest strike price minus net premium received. Maximum loss can occur when the stock price is between the two break-even points, when the stock price is between the middle strike price & upper break-even point, equals to upper break-even point minus stock price, and when the price is between the lower break-even point & the middle strike price, equals to the stock price minus lower break-even point. Compared with a Long Straddle, a Short Butterfly Spread has limited profit potential, and it may prove difficult to execute this strategy in a timely manner.
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| Symbol |
Rate |
| GBP:CHF |
1.747703 |
| GBP:JPY |
155.484239 |
| GBP:USD |
1.638403 |
| NZD:USD |
0.627050 |
| EUR:CAD |
1.545998 |
| EUR:CHF |
1.516857 |
| EUR:GBP |
0.867915 |
| EUR:JPY |
134.947096 |
| EUR:USD |
1.421994 |
| AUD:JPY |
76.394373 |
| AUD:USD |
0.805000 |
| USD:CAD |
1.087204 |
| USD:CHF |
1.066711 |
| USD:JPY |
94.899879 |
| USD:SEK |
7.613010 |
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specific commercial, financial, investment, accounting, tax, or legal advice.
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© ForexCenter.com, 2005, All Rights Reserved
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History