The Butterfly Spread
a butterfly spread is a neutral option strategy with both limited risk and limited profit potential. the strategy involves four option contracts with the same expiration month but with three different strike prices. using eithter all calls or all puts, an investor sells two options at a middle strike price, while simultaneously buying one contract at a lower and one at a higher strike price. the price difference between the middle strike price and the upper and lower strike prices should be the same. for example, an investor believes that the stock for kingscare medicals, kcm, will be trading at $50 at expiration. the investor sells two call options at this price. at the same time, the investor buys two call options, one at a lower and one at a higher strike price. he buys one kcm 45 call at $8.00. he sells two kcm 50 calls at $5.50. he buys one kcm 55 call at $3.75. a butterfly spread essentially creates two trades. the first is a long 45 and a short 50 call spread. the second is a short 50 call and a long 55 call spread. in this example, the investor pays an $8.00 premium for the kcm 45 call and $3.75 for the kcm 55 call and receives $11 for ? the two kcm 50 calls, resulting in a net debit of $0.75 or $75 total. the net debit represents the investors maximum loss on the trade plus any commissions. the investor will achieve maximum profits if the stock kingscare medicals closes at expiration at the short strike price of $50. in this case, the kcm 45 call would expire in the money with an intrinsic value of $5.00. the kcm 50 calls would expire out of the money and be workless, and the kcm 55 call would expire out of the money and be workless. the profit would be the $5.00 received for the kcm 45 call less the $0.75 debit for a net of $5.00 minus $0.75, which is $4.25 or $425 total profit less any commissions. a butterfly spread may be an appropriate strategy for investors who thinks that the underlying stock will not rise or fall significantly before expiration, who want to limit potential losses from price fluctuations in the underlying stock and who want to attempt to profit from a neutral market.
- butterfly spread・・・バタフライスプレッド