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Butterfly Spreads and Types

Butterfly Spreads and Types

Butterfly Spreads:

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.This strategy has limited risk and limited profit.

Butterfly Spreads and Types

Long Call Butterfly:- Long butterfly spreads are entered when the investor thinks that the underlying stock will not rise or fall much by expiration. Using calls, the long butterfly can be constructed by buying one lower striking in-the-money call, writing two at-the-money calls and buying another higher striking out-of-the-money call. A resulting net debit is taken to enter the trade.

Short Call Butterfly:- Using calls, the short call butterfly can be constructed by selling one lower strike price in-the-money call, buying two at-the-money calls and selling another higher strike price out-of-the-money call, giving the trader a net credit to enter the position.

Butterfly Spreads and Types

Long Put Butterfly:- The long put butterfly spread is a limited profit, limited risk options trading strategy that is taken when the options trader thinks that the underlying security will not rise or fall much by expiration. There are 3 strike prices involved in a long put butterfly spread and it is constructed by buying one lower strike price put, selling two at the-money puts and buying another higher strike price put for a net debit.

Short Put Butterfly:- The short put butterfly is a neutral strategy like the long put butterfly but bullish on volatility. It is a limited profit, limited risk options strategy. There are 3 strike prices involved in a short put butterfly and it can be constructed by selling one lower strike price out-of-the-money put, buying two at-the-money puts and selling another higher strike price in-the-money put, giving the options trader a net credit to put on the trade.

Butterfly Spreads and Types

Iron Butterfly:- The iron butterfly spread is a limited risk, limited profit trading strategy that is structured for a larger probability of earning a smaller limited profit when the underlying stock is perceived to have a low volatility. To setup an iron butterfly, the options trader buys a lower strike price out-of-the-money put, sells a middle strike price at-the-money put, sells a middle strike at-the-money call and buys another higher strike out-of-the-money call. This results in a net credit to enter into the trade.

Reverse Iron Butterfly:- The reverse (short) iron butterfly is a limited risk, limited profit options trading strategy that is designed to make a profit when the underlying stock price makes a sharp move either up or down. To setup a reverse iron butterfly, the options trader sells a lower strike price out-of-the-money put, buys a middle strike price at-the-money put, buys another middle strike price at-the-money call and sells another higher strike price out-of-the-money call. There will be a net debit taken to enter into the trade.

Butterfly Spreads and Types

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