Options Strategies
Short Butterfly Spread
Strategies Short Butterfly Spread
Component Sell 1 call with lower strike price/level, buy 2 call with middle strike price/level and sell 1 call with higher strike price/index level
Potential Profit
  • When the stock price/index level is below the lower break-even point or above the upper break-even point
  • Limited to net premium received
Maximum Loss 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 & the middle strike price, equals to the stock price/index level minus lower break-even point
Time Value Impact Neutral
Break-even
  • The lower break-even point equals to the lowest strike price/level plus net premium received
  • The upper break-even point equals to the highest strike price/level minus net premium received
Remarks Compared with a Long Straddle, a Short Butterfly Spread has limited profit potential.
Example
  Net Position -1 Jun 180 Call +2 Jun 200 Call
  -1 Jun 220 Call    

Component Sell 1 ABC Jun $180 Call, receive $20 and buy 2 ABC Jun $200 Call each at $10, totally pay $20 and sell 1 ABC Jun $220 Call, receive $5
Net Premium Receive $20-$20+$5=$5
Break-even
  • Lower: $180+$5=$185
  • Upper: $220-$5=$215
Profit when Stock price is below $185 or above $215
Potential Profit $5
Potential Loss
  • When the stock price is between $185 & $200, stock price - $185
  • When the stock price is between $200 & $215, $215 - stock price
Time Value Impact Neutral

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