Butterfly Spread

 

Long Butterfly Spread

A long butterfly spread is a neutral position that’s used when a trader believes that the price of an underlying is going to stay within a relatively tight range.

Directional Assumption: Neutral

Setup: This spread is typically created using a ratio of 1-2-1 (1 ITM option, 2 ATM options, 1 OTM option).
- Buy Call/Put (above short strike)
- Sell 2 Calls/Puts
- Buy Call/Put (below short strike)

Ideal Implied Volatility Environment : High

Max Profit: The distance between the short strike and long strike, less the debit paid.

How to Calculate Breakeven(s):
- Upside: Higher Long Option Strike - Debit Paid
- Downside: Lower Long Option Strike + Debit Paid