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Double Butterfly Spread  Introduction
The Double Butterfly Spread is an advanced butterfly spread that uses a combination of two butterfly spreads in order to create peak profit across two different strike prices. A normal butterfly spread is capable of peak profit only when the price of the underlying asset closes exactly on the middle strike price. However, if the price of the underlying asset is expected to close at either one of two prices, you can put two seperate butterfly spreads targetting each price together to create a Double Butterfly Spread in order to maximise profit no matter which price it hits with very little capital commitment.
This tutorial shall explore in depth how a Double Butterfly Spread is created, when it should be used and all related calculations. Learning the Butterfly Spread first makes the Double Butterfly Spread easier to understand.
Double Butterfly Spread  Classification
Strategy : Neutral

Outlook : Loose Neutral

Spread : Vertical Spread

Debit or Credit : Debit
When To Use Double Butterfly Spread?
One could use a Double Butterfly Spread when one expects the price of the underlying stock to close exactly at either one of two different strike prices by expiration.
How To Use Double Butterfly Spread?
A Double Butterfly Spread is simply putting on two seperate butterfly spreads with middle strike prices on two different strike prices. This creates a position with two peak profits on two strike prices. While a butterfly spread is used for targetting a single strike price, Double Butterfly Spreads target two different strike prices to increase the chances of peak profitability and are useful when the price of the underlying asset is expected to hit one of two prices due to factors such as a potential takeover.
Double Butterfly Spreads are usually used when the targetted prices are more than one strike apart. If the targetted prices are two consecutive strike prices, a Condor Spread could be used instead with almost the same profitability and incurring a lot lesser commissions due to fewer trades making up the position. However, if the targetted prices are more than one strike apart, using a condor spread would yield a lot lesser maximum profit due to the fact that it is also maintaining peak profit potential in between the two targetted strike prices.
As such, the Double Butterfly Spread is a huge six legged options position with three legs forming each butterfly spread. It can also be constructed using only call options (known as a Call Double Butterfly Spread) or put options (known as a Put Double Butterfly Spread) or even a combination of both with one Call Butterfly Spread pairing up with a Put Butterfly Spread. The outcome and capital outlay of all three configurations should not be very different when put call parity is not severely broken.
Establishing Call Double Butterfly Spread
Call Double Butterfly Spreads consist of two Call Butterfly Spreads with middle strike price on two different strike prices which are at least one strike price apart.
Call Double Butterfly Spread Example
Assuming QQQQ trading at $56.90.
Jan55Call $2.27, Jan56Call $1.50, Jan57Call $0.90, Jan58Call $0.44, Jan59Call $0.19
Jan55Put $0.40, Jan56Put $0.63, Jan57Put $1.00, Jan58Put $1.56, Jan59Put $2.30
Assuming we are targetting $56 and $58.
Call Butterfly Spread 1: Buy 1 Jan55Call, Sell 2 Jan56Call, Buy 1 Jan57Call = (2.27 + 0.9)  (1.50 x 2) = $3.17  $3.00 = $0.17
Call Butterfly Spread 2: Buy 1 Jan57Call, Sell 2 Jan58Call, Buy 1 Jan59Call = (0.9 + 0.19)  (0.44 x 2) = $1.09  $0.88 = $0.21
Total Debit = $0.17 + $0.21 = $0.38

Establishing Put Double Butterfly Spread
Put Double Butterfly Spreads consist of two Put Butterfly Spreads with middle strike price on two different strike prices which are at least one strike price apart. We shall target the same strike prices as the Call Double Butterfly Spread example above using only put options.
Put Double Butterfly Spread Example
Assuming QQQQ trading at $56.90.
Jan55Call $2.27, Jan56Call $1.50, Jan57Call $0.90, Jan58Call $0.44, Jan59Call $0.19
Jan55Put $0.40, Jan56Put $0.63, Jan57Put $1.00, Jan58Put $1.56, Jan59Put $2.30
Assuming we are targetting $56 and $58.
Put Butterfly Spread 1: Buy 1 Jan55Put, Sell 2 Jan56Put, Buy 1 Jan57Put = (0.4 + 1)  (0.63 x 2) = $1.40  $1.26 = $0.14
Put Butterfly Spread 2: Buy 1 Jan57Put, Sell 2 Jan58Put, Buy 1 Jan59Put = (1 + 2.3)  (1.56 x 2) = $3.3  $3.12 = $0.18
Total Debit = $0.14 + $0.18 = $0.32

Establishing Mixed Double Butterfly Spread
Mixed Double Butterfly Spreads consist of a Call Butterfly Spread and a Put Butterfly Spread with middle strike price on two different strike prices which are at least one strike price apart. Mixed Double Butterfly Spreads can be setup with the Call Butterfly Spread targetting the lower strike price and the Put Butterfly Spread targetting the higher strike price and vice versa. We shall target the same strike prices as the Call Double Butterfly Spread example above using both combinations of Mixed Double Butterfly Spread.
Mixed Double Butterfly Spread Example
Assuming QQQQ trading at $56.90.
Jan55Call $2.27, Jan56Call $1.50, Jan57Call $0.90, Jan58Call $0.44, Jan59Call $0.19
Jan55Put $0.40, Jan56Put $0.63, Jan57Put $1.00, Jan58Put $1.56, Jan59Put $2.30
Assuming we are targetting $56 and $58.
Call Butterfly Spread 1: Buy 1 Jan55Call, Sell 2 Jan56Call, Buy 1 Jan57Call = (2.27 + 0.9)  (1.50 x 2) = $3.17  $3.00 = $0.17
Put Butterfly Spread 2: Buy 1 Jan57Put, Sell 2 Jan58Put, Buy 1 Jan59Put = (1 + 2.3)  (1.56 x 2) = $3.3  $3.12 = $0.18
Total Debit = $0.17 + $0.18 = $0.35
Put Butterfly Spread 1: Buy 1 Jan55Put, Sell 2 Jan56Put, Buy 1 Jan57Put = (0.4 + 1)  (0.63 x 2) = $1.40  $1.26 = $0.14
Call Butterfly Spread 2: Buy 1 Jan57Call, Sell 2 Jan58Call, Buy 1 Jan59Call = (0.9 + 0.19)  (0.44 x 2) = $1.09  $0.88 = $0.21
Total Debit = $0.14 + $0.21 = $0.35

In this case, since the Put Double Butterfly Spread requires a lower net debit than the Call Double Butterfly Spread and the Mixed Double Butterfly Spread, the Put Double Butterfly Spread should be used instead.
Trading Level Required For Double Butterfly Spread
A Level 3 options trading account that allows the execution of debit spreads is needed for the Double Butterfly Spread. There are brokers who requires level 4 or 5 accounts for Double Butterfly Spreads as well. Please check with your broker. Read more about Options Account Trading Levels.
Profit Potential of Double Butterfly Spread :
Double Butterfly Spreads achieve their maximum profit potential when the price of the underlying asset closes at either one of the two targetted strike prices. The profitability of a Double Butterfly Spread can also be enhanced or better guaranteed by legging into the position properly.
Profit Calculation of Double Butterfly Spread:
Maximum Profit = $1  Net Debit
Maximum Loss = Net Debit
Profit Calculation for Double Butterfly Spread
Following up on the above Put Double Butterfly Spread example:
Maximum Profit = $1.00  $0.32 = $0.68
Maximum Loss = $0.32
Reward Risk Ratio = $0.68 / $0.32 = 2.13

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Risk / Reward of Double Butterfly Spread:
Upside Maximum Profit: Limited
Maximum Loss: Limited
Break Even Points of Double Butterfly Spread:
There are four breakeven points for a Double Butterfly Spread. Each set of two breakeven points created by each butterfly spread defines a price range within which profit occurs for the Double Butterfly Spread. Each set of breakeven points are to be calculated seperately for each component butterfly spread using the below formula:
1. Lower Breakeven Point : Total Net Debit + Lower Strike Price
2. Upper Breakeven Point : Higher Strike Price  Total Net Debit
Breakeven Calculation for Double Butterfly Spread
Following up on the above Put Double Butterfly Spread example:
Put Butterfly Spread 1: Buy 1 Jan55Put, Sell 2 Jan56Put, Buy 1 Jan57Put = (0.4 + 1)  (0.63 x 2) = $1.40  $1.26 = $0.14
Lower Breakeven : $0.32 + $55 = $55.32
Higher Breakeven : $57  $0.32 = $56.68
Put Butterfly Spread 2: Buy 1 Jan57Put, Sell 2 Jan58Put, Buy 1 Jan59Put = (1 + 2.3)  (1.56 x 2) = $3.3  $3.12 = $0.18
Lower Breakeven : $0.32 + $57 = $57.32
Higher Breakeven : $59  $0.32 = $58.68

Advantages Of Double Butterfly Spread:
:: Able to target two different specific strike prices.
:: Higher profit potential than Condor Spread when either price is hit.
Disadvantages Of Double Butterfly Spread:
:: Larger commissions involved due to large number of trades making up the position.
Adjustments for Double Butterfly Spreads Before Expiration :
1. When it is obvious that the underlying stock is going to go for one of the two strike prices, you could close out the other butterfly spread and hold only the butterfly spread that targets the correct strike price, reducing the position to a regular butterfly spread and increasing profitability.

