Our Recommendations :-
Follow CA Final FB Page

What is BUTTERFLY SPREAD?

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 ROSHNI asked about 3 years ago

    2       0 Answer Now Comment Report
7 Answers
Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 CA Sandeep Bohra answered almost 3 years ago

> BUTTERFLY SPREAD --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. **Breakeven Point(s)** There are 2 break-even points for the butterfly spread position. The breakeven points can be calculated using the following formulae. • Upper Breakeven Point = Strike Price of Higher Strike Long Call - Net Premium Paid • Lower Breakeven Point = Strike Price of Lower Strike Long Call + Net Premium Paid **Short Butterfly** The converse strategy to the long butterfly is the short butterfly. Short butterfly spreads are used when high volatility is expected to push the stock price in either direction. **Long Put Butterfly** The long butterfly trading strategy can also be created using puts instead of calls and is known as a long put butterfly.

    0       0 Comment Report
Important Note – Preparing for CA Final?
CAKART provides Indias top faculty each subject video classes and lectures – online & in Pen Drive/ DVD – at very cost effective rates. Get video classes from CAKART.in. Quality is much better than local tuition, so results are much better.
Watch Sample Video Now by clicking on the link(s) below – 
For any questions Request A Call Back  
Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 narahari answered almost 3 years ago

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.

    0       0 Comment Report
Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 lochan answered about 3 years ago

DEFINITION OF 'BUTTERFLY SPREAD' A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration but three different strike prices to create a range of prices the strategy can profit from. The trader sells two option contracts at the middle strike price and buys one option contract at a lower strike price and one option contract at a higher strike price. Both puts and calls can be used for a butterfly spread. Thanks

    0       0 Comment Report
Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 DEEPAK SINGHAL answered about 3 years ago

DEFINITION of 'Butterfly Spread' A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration but three different strike prices to create a range of prices the strategy can profit from. The trader sells two option contracts at the middle strike price and buys one option contract at a lower strike price and one option contract at a higher strike price. Both puts and calls can be used for a butterfly spread.

    1       0 Comment Report
Open uri20170510 32134 1ue0f38?1494421710 rohit agarwal answered about 3 years ago

Hi Roshni, So far as your query is concerned that What is BUTTERFLY SPREAD? The following is an detailed explanation for BUTTERFLY SPREAD Butterfly Spread ---------------- 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. 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 strikingout-of-the-money call. A resulting net debit is taken to enter the trade. Limited Profit -------------- Maximum profit for the long butterfly spread is attained when the underlying stock price remains unchanged at expiration. At this price, only the lower striking call expires in the money. The formula for calculating maximum profit is given below: • Max Profit = Strike Price of Short Call - Strike Price of Lower Strike Long Call - Net Premium Paid - Commissions Paid • Max Profit Achieved When Price of Underlying = Strike Price of Short Calls Limited Risk ------------ Maximum loss for the long butterfly spread is limited to the initial debit taken to enter the trade plus commissions. The formula for calculating maximum loss is given below: • Max Loss = Net Premium Paid + Commissions Paid • Max Loss Occurs When Price of Underlying <= Strike Price of Lower Strike Long Call OR Price of Underlying >= Strike Price of Higher Strike Long Call Breakeven Point(s) ------------------ There are 2 break-even points for the butterfly spread position. The breakeven points can be calculated using the following formulae. • Upper Breakeven Point = Strike Price of Higher Strike Long Call - Net Premium Paid • Lower Breakeven Point = Strike Price of Lower Strike Long Call + Net Premium Paid Example ------- Suppose XYZ stock is trading at $40 in June. An options trader executes a long call butterfly by purchasing a JUL 30 call for $1100, writing two JUL 40 calls for $400 each and purchasing another JUL 50 call for $100. The net debit taken to enter the position is $400, which is also his maximum possible loss. On expiration in July, XYZ stock is still trading at $40. The JUL 40 calls and the JUL 50 call expire worthless while the JUL 30 call still has an intrinsic value of $1000. Subtracting the initial debit of $400, the resulting profit is $600, which is also the maximum profit attainable. Maximum loss results when the stock is trading below $30 or above $50. At $30, all the options expires worthless. Above $50, any "profit" from the two long calls will be neutralised by the "loss" from the two short calls. In both situations, the butterfly trader suffers maximum loss which is the initial debit taken to enter the trade. Commissions ----------- Commission charges can make a significant impact to overall profit or loss when implementing option spreads strategies. Their effect is even more pronounced for the butterfly spread as there are 4 legs involved in this trade compared to simpler strategies like the vertical spreads which have only 2 legs. Short Butterfly --------------- The converse strategy to the long butterfly is the short butterfly. Short butterfly spreads are used when high volatility is expected to push the stock price in either direction. Long Put Butterfly ------------------ The long butterfly trading strategy can also be created using puts instead of calls and is known as a long put butterfly. Wingspreads ----------- The butterfly spread belongs to a family of spreads called wingspreads whose members are named after a myriad of flying creatures. Hope u find the above detailed explanation on BUTTERFLY SPREAD useful.. Thanks & Regards

    8       0 Comment Report
Open uri20170510 32134 1nqu8aj?1494421649 sowmya answered about 3 years ago

Hii Roshini, 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. 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 Butterfly The converse strategy to the long butterfly is the short butterfly. Short butterfly spreads are used when high volatility is expected to push the stock price in either direction. Regards,

    2       0 Comment Report
Data?1494421730 rohit awasthi answered about 3 years ago

Hii Roshni > Butterfly Spread It can be Long Butterfly Spread and Short Butterfly Spread LONG BUTTERFLY SPREAD LONG BUTTERFLY SPREAD - It involves four options at three different strike prices. One such way of creating Butterfly Spread is as follows : Buy a call option with a lower strike price & Buy another call with a higher strike price. Then sells two call options with strike rates in between higher strike price and lower strike price . all the options have same expiry date . Break-even Point- There are 2 break-even points for the butterfly spread position. The breakeven points can be calculated using the following formulae. Upper Breakeven Point = Strike Price of Higher Strike Long Call - Net Premium Paid Lower Breakeven Point = Strike Price of Lower Strike Long Call + Net Premium Paid SHORT BUTTERFLY SPREAD SHORT BUTTERFLY SPREAD Sell 1 Call ,Buy 2 Calls and Sell 1 Call in the same manner as Long Butterfly Spread. If question is silent always assume Long Butterfly Spread. Thanks

    4       0 Comment Report
Get Notifications
Videos
Books
Notes
Loading
SIGN UP
Watch best faculty demo video classes

These top faculty video lectures will
help u prepare like nothing else can.