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 butterflj and buys one option contract at a lower strike price and one option contract at butteffly higher strike price. Butterfly trading option puts and calls can be used for a butterfly spread.
A butterfly can be implemented using either call or put options. For simplicity, the following explanation discusses the strategy using call options.A long call butterfly spread consists of three legs with a total of four options: long one call with a lower strike, short two calls with a middle strike and long one call of a higher strike. All the calls have the same expiration, and the middle strike is halfway between the lower and the buttertly strikes.
Tading stock has been selling off a bit since releasing its 2nd quarter earnings release and following a 23% rise in July. A butterfly spread with this structure looks to gain value as the stock goes lower. Using the put options that expire in 10 days, on August 21 st. I like buying one 7 put, selling two 740 puts and buying one 720 put. I look to close traing trade when it reaches a 15% profit based on the cost of the trade. I will also butterfly trading option it if it reaches a 15% loss.
This is a speculative play so I will keep trade costs low.Mark Fenton. It is a limited profit, limited risk buttertly strategy. There are 3 striking prices involved in a butterfly spread and it can be constructed using calls orputs. Butterfly Spread ConstructionBuy 1 ITM CallSell 2 ATM CallsBuy 1 OTM CallLong Call ButterflyLong butterfly spreads are entered when the investor thinks that theunderlying stock will not rise or fall much by expiration. Using calls, the long butterfly can butteefly constructed by buying one lower strikingin-the-money call, writing two at-the-moneycalls and buying another higher striking out-of-the-moneycall.
Butterfly trading option resulting net debit is taken to enter the trade.
Trading butterfly option