30-03-2012, 02:29 PM
Butterfly Strategy
Butterfly Strategy.pptx (Size: 53.02 KB / Downloads: 41)
A three-legged option spread in which each leg has the same expiration date but different strike prices.
There are 3 striking prices involved in a butterfly spread and it can be constructed using calls or puts.
Limited profit, limited risk options strategy
Long Call Butterfly
Long butterfly spreads are entered when the investor thinks that the underlying stock will not rise or fall much by expiration.
A butterfly spread can be created through different combinations of long and put options.
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.
Breakeven Point
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