Combos are sometimes much more interesting than a single option.
Butterfly spread is one of those combos.



1 - Features
3 options are needed for a butterfly, same type (calls or puts)
- Same maturity
- Same underlying
- Strikes are set in order to have a strike that is equidistant to others.

For example:
K1=80
K2=100
K3=120
and K2-K1=K3-K2=20

or,
K1=12
K2=15
K3=18
and K2-K1=K3-K2=3



2 - Strategy
The butterfly spread is composed with:
- A long option struck at K1
- A short 2 options struck at K2
- A long option struck at K3



3 - Graphs
1 Year Butterfly90/100/110 in 2 dimensions

This works out only at expiry.

Before expiry, a 3 dimensions graph is needed.
If one assumes a zero cost for the butterfly spread, it leads to:


The obvious advantage is the small bet for a possible great payoff.


Next : Butterfly Spread : The Delta ∆
Previous: Iron Condor - SO Set Up

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Advanced Strategies - INDEX
Advanced Strategies - CHAPTER I
Advanced Strategies - CHAPTER II
Advanced Strategies - CHAPTER III
Advanced Strategies - CHAPTER IV
Advanced Strategies - CHAPTER V

Strategies Options