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Options Strategies
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Long Butterfly Spread
| Strategies |
Long Butterfly Spread |
| Component |
Buy 1 call with lower strike price/level, sell 2 call with middle strike price/level and buy 1 call with higher strike price/level |
| Potential Profit |
When the stock price/index level is between the two break-even points
- When the stock price/index level is between the middle strike price & upper break-even point: equals to upper break-even point minus stock price/index level
- When the stock price/index level is between the lower break-even point & middle strike price: equals to stock price/index level minus lower break-even point
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| Maximum Loss |
Limited to the net premium paid |
| Time Value Impact |
Neutral |
| Break-even |
- The lower break-even point equals to the lowest strike price/level plus net premium paid
- The upper break-even point equals to the highest strike price/level minus net premium paid
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| Remarks |
Compared with a Short Straddle, a Long Butterfly Spread has limited loss when the stock price/index level is outside the break-even range.
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Example
| Component |
Buy 1 ABC Jun $180 Call, pay $20 and sell 2 ABC Jun $200 Call each at $10, totally receive $20 and buy 1 ABC Jun $220 Call, pay $5 |
| Net Premium |
Pay $20-$20+$5=$5 |
| Break-even |
- Lower: $180+$5=$185
- Upper: $220-$5=$215
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| Profit when |
Stock price is between $185 and $215 |
| Potential Profit |
- When the stock price is between $185 & $200, stock price - $185
- When the stock price is between $200 & $215, $215 - stock price
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| Potential Loss |
$5 |
| Time Value Impact |
Neutral |
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