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Short Butterfly Spread Profile Version / Simplified Version / Comprehensive Version


Purpose Of Short Butterfly Spread
1. To Profit From Both Up Or Down Move


Expectation Of Short Butterfly Spread
Volatile


Type Of Spread
Credit Spread


How To Use Short Butterfly Spread?
Sell To Open X number of In The Money Call Options. 2. Sell To Open X number of Out Of The Money Call Options. 3. Buy To Open 2X number of At The Money Call Options.

Sell ITM Call + Sell OTM Call + Buy ATM Call 		Short Butterfly Spread Risk Graph Learn How To Read This Chart

Profit Potential of Short Butterfly Spread :
Short Butterfly spreads achieve their maximum profit potential, which is the net credit received from putting on the positions, at expiration if the price of the underlying asset exceeds either the upper breakeven point or lower breakeven point.

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Profit Calculation of Butterfly Spread:
Maximum Profit = Net Credit
Maximum Loss = (Difference between consecutive strike prices - credit) * 100


Risk / Reward of Butterfly Spread:

Upside Maximum Profit: Limited

Maximum Loss: Limited


Break Even Points of Short Butterfly Spread:
A Short Butterfly Spread is profitable if the underlying asset expires above the upper breakeven point or below the lower breakeven point.

1. Lower Breakeven Point : Net Credit + Lower Strike Price

2. Upper Breakeven Point : Higher Strike Price - Net Credit

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Advantages Of Short Butterfly Spread:

  • Typically has a narrower breakeven range than a straddle or strangle.

  • Credit spread means that time decay works in your favor.

  • Maximum loss and profits are predictable.

  • Highest maximum profits amongst all the complex volatile option strategies.


    Disadvantages Of Short Butterfly Spread:

  • Larger commissions involved than simpler strategies with lesser trades.

  • Not a strategy that traders with low trading levels can execute.


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