What Is a Butterfly Spread?
A butterfly spread is an options strategy combining bull and bear spreads, with a fixed risk and capped profit. (蝶式價差)
Butterfly spreads use four option contracts with the same expiration but three different strike prices. A higher strike price, an at-the-money strike price, and a lower strike price. The options with the higher and lower strike prices are the same distance from the at-the-money options.
Each type of butterfly has a maximum profit and a maximum loss.
Puts or calls can be used for a butterfly spread. Combining the options in various ways will create different types of butterfly spreads, each designed to either profit from volatility or low volatility.
Long Call Butterfly Spread (LC 95, SC 100 x2, LC 105)
Net debt is created when entering the trade.
Long Put Butterfly Spread (LP 105, SP 100 x2, LP 95)
Net debt is created when entering the position.
Short Call Butterfly Spread (SC 95, LC 100 x2, SC 105)
A short butterfly spread with calls is the strategy of choice when the forecast is for a stock price move outside the range of the highest and lowest strike prices. (股價大升). The maximum profit for the strategy is the premiums received.
Short Put Butterfly Spread (SP 105, LP 100 x2, SP 95)
A short butterfly spread with puts realizes its maximum profit if the stock price is above the higher strike or below the lower strike on the expiration date. The forecast, therefore, must be for "high volatility, (高於市場SP買貨 or 股價大跌). The maximum profit for the strategy is the premiums received.
Iron Butterfly Spread (LP 95, SP 100, SC 100, LC 105)
The result is a trade with a net credit that's best suited for lower volatility scenarios. The maximum profit occurs if the underlying stays at the middle strike price.
Reverse Iron Butterfly Spread (SP 95, LP 100, LC 100, SC 105)
This creates a net debit trade that's best suited for high-volatility scenarios. Maximum profit occurs when the price of the underlying moves above or below the upper or lower strike prices.
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