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 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. 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.
Maximum loss for the long butterfly spread is limited to the initial debit taken to enter the trade plus commissions. There are 2 break-even points for the butterfly spread position. The breakeven points can be calculated using the following formulae.
In both situations, the butterfly trader suffers maximum loss which is the initial debit taken to enter the trade. While we have covered the use of this strategy with reference to stock options, the butterfly spread is equally applicable using ETF options, index options as well as options on futures.
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.
If you make multi-legged options trades frequently, you should check out the brokerage firm OptionsHouse.
Options Spreads - Electronic Platform Information Console - Confluence
The following strategies are similar to the butterfly spread in that they are also low volatility strategies that have limited profit potential and limited risk. 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. The long butterfly trading strategy can also be created using puts instead of calls and is known as a long put butterfly.
The butterfly spread belongs to a family of spreads called wingspreads whose members are named after a myriad of flying creatures. Your new trading account comes with a virtual trading platform which you can use to test out your trading strategies without risking hard-earned money.
Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable.
For instance, a sell off can occur even though the earnings report is good if investors had expected great results If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time Cash dividends issued by stocks have big impact on their option prices.
This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement.
In place of holding the underlying stock in the covered call strategy, the alternative Some stocks pay generous dividends every quarter.
Butterfly Strategy | Options Trading at optionsXpress
You qualify for the dividend if you are holding on the shares before the ex-dividend date To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions.
They are known as "the greeks" Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account.
You should not risk more than you afford to lose.
Long Butterfly Spread with Calls - Fidelity
Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service.
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