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Butterfly Spread Explained | Online Option Trading Guide
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By using this service, you agree to 1 use your real name and email address and 2 request that Schwab send the email only to people that you know. It is a violation of law in some jurisdictions to falsely identify yourself in an email.
You also agree that you alone are responsible as the sender of the email. Schwab will not store or use the information you provide above for any purpose except in sending the email on your behalf. When derivatives traders discuss "exotic" option strategies, one strategy that is often mentioned is a butterfly.
A long butterfly is a very unique strategy because it has a limited loss potential in either direction, and a profit zone lies between the two. It is a neutral strategy that is appropriate when you expect the underlying security not to move significantly over the life of the options.
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While it sounds complicated and might even look so pictured on a graph , it is fairly easy to understand. A long call put butterfly spread is a three-leg strategy with three different strike prices:. The options all have the same expiration date. Also, note that the middle strike price is halfway between the lower and the higher strikes.
Butterfly Strategy | Options Trading at optionsXpress
The position is considered "long" because a net cash outlay is required to initiate it. Like many option strategies, the maximum gain, maximum loss, and breakeven points are all known at the point of order entry. When butterfly spreads were first introduced, there was very little demand from retail option traders primarily due to the high commission costs.
Furthermore, since a long butterfly typically generates only modest profits relative to the risks involved, it was therefore initially better suited to institutional traders.
The ideal time to enter a butterfly order is often when you expect very little movement in the underlying instrument stock or ETF , and it is trading very near the middle strike price. At Schwab, you get a discount on commissions when you enter multi-legged option strategies such as spreads, straddles, butterflies, condors, etc.
The market price of this butterfly spread is a net debit of 3. Two breakeven points sit at A long butterfly spread can be created using either calls or puts, and the general characteristics are very similar regardless of your choice.
While a long butterfly is a neutral strategy, you can put a very slight bullish or bearish bias on it, depending whether you use above the money ABTM , around the money RTM or below the money BTM calls or puts. I hope this article enhanced your understanding of options. I welcome your feedback—clicking on the thumbs up or thumbs down icons at the bottom of the page will allow you to contribute your thoughts.
If you are logged into Schwab. Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Multiple-leg options strategies will involve multiple commissions. Covered calls provide downside protection only to the extent of the premium received and limit upside potential to the strike price plus premium received.
For the sake of simplicity, the examples in this presentation do not take into consideration commissions and other transaction fees, tax considerations, or margin requirements, which are factors that may significantly affect the economic consequences of strategies displayed.
Please contact a tax advisor for the tax implications involved in these strategies. Spread trading must be done in a margin account.
When there is more than one possible way to pair available options in your Account, Schwab has the discretion to determine spread pairings. Schwab may pair options in a manner that does not produce the lowest possible margin requirements. Supporting documentation for any claims or statistical information is available upon request. Schwab's StreetSmart Edge and StreetSmart. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.
The investment strategies mentioned here may not be suitable for everyone.
Iron butterfly option strategy
Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources.
However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
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Key Points A long butterfly spread is a neutral strategy—appropriate when you expect the underlying security to remain in a narrow trading range over the life of the options. It can be built with either calls or puts and have a slight bullish or slight bearish bias. We look at how you might select strike prices for a long butterfly spread. Profit and loss profile for a long butterfly spread.
Schwab Center for Financial Research. XYZ at 55 or below at expiration: Considerations for selecting a strike price. Next Steps Talk to Us To discuss how this article might affect your investment decisions: Call Schwab anytime at Talk to a Schwab Financial Consultant at your local branch. Please try again in a few minutes. Important Disclosures Options carry a high level of risk and are not suitable for all investors.