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Options Strategies
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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
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| 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
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| 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
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| Remarks |
Compared with a Long Straddle, a Short Butterfly Spread has limited profit potential. |
Example
| 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
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| 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
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| Time Value Impact |
Neutral |
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