| Long Call Butterfly | |
|---|---|
| Long 1 XYZ Sep 50 call @ $2.00, Short 2 XYZ Sep 55 calls @ $1.00, Long 1 XYZ Sep 60 call @ $.50 | |
| Total Cost | Option premium paid, $50 |
| Maximum Loss | Option premium paid, $50 |
| Maximum Profit | Dollar value of difference between outside and middle strike prices minus premium paid, $450 |
| Short Call Butterfly: | |
| Short 1 XYZ Sep 50 call @ $2.00, Long 2 XYZ Sep 55 calls @ $1.00, Short 1 XYZ Sep 60 call @ $.50 | |
| Total Credit Received | Net option premium received, $50 |
| Maximum Loss | Dollar value of difference between outside and middle strike prices minus credit received, $450 |
| Maximum Profit | Net option premium received, $50 |
| Long Put Butterfly: | |
| Long 1 XYZ Sep 30 put @ $.25, Short 2 XYZ Sep 35 puts @ $.50, Long 1 XYZ Sep 40 put @ $1.00 | |
| Total Cost | Option premium paid, $25 |
| Maximum Loss | Option premium paid, $25 |
| Maximum Profit | Dollar value of difference between outside and middle strike prices minus premium paid, $475 |
| Short Put Butterfly | |
| Short 1 XYZ Sep 30 put @ $.25, Long 2 XYZ Sep 35 puts @ $.50, Short 1 XYZ Sep 40 put @ $1.00 | |
| Total Credit Received | Net option premium received, $25 |
| Maximum Loss | Dollar value of difference between outside and middle strike prices minus credit received, $475 |
| Maximum Profit | Net option premium received, $25 |
Explanation and Application
Butterflies, condors and "wingspreads" are so-called because with sufficient -- no, make that CONSIDERABLE imagination, their expiration date risk profiles look like something that could fly. That, and anything that can add a bit of color to the otherwise dreary world of option trading is welcome. When talking about butterflies et al., you'll hear self-proclaimed experts speak of options as "body" and "wings". The "body" refers to options with strikes in between the two exoskeletal outermost strikes. The "wings" refer to options at the diaphanous outermost strikes. We use the term "wingspreads" to identify option positions such as "condors", "pterodactyls" and "albatrosses", which look like butterflies that have been stretched out. Rather than come up with a myriad of names to identify these spreads, we use "wingspreads" because they all have similar risk/reward characteristics and sensitivities, and those flying creatures are much more threatening than butterflies.
The risks and potential rewards of butterflies and wingspreads are limited. If you buy a butterfly, the most you can lose is the amount you paid for it. The most you can make is the difference between the "body" strike and a "wing" strike minus the amount you paid for it. If you sell a butterfly, the loss and profit are the inverse of buying a butterfly.
