Short Butterfly班級：碩研財金一甲指導教授：張上財學號： MA180101 姓名：劉芷綾

Purpose

• What is the butterfly option spread？

• The butterfly spread is put together to create a low risk, low reward options strategy and is designed to take advantage of a market or stock that is range bound.

• The butterfly can be created using call options or put options.

Purpose

• What is the butterfly option spread？

• The strategy is termed "butterfly" due to the shape of the risk characteristics graph you see below; notice the two wings and then the larger body.

• The butterfly spread is constructed through buying 1 long ITM call, shorting 2 ATM calls, and buying 1 long OTM call.

• The ratio between the 3 options should be 1:2:1 and the distance between the strike prices of the long options should be equidistant from the short call strike.

Purpose

• Short Butterfly

• The short butterfly is a neutral strategy like the long butterfly but bullish on volatility.

• It is a limited profit, limited risk options trading strategy.

• There are 3 striking prices involved in a short butterfly spread and it can be constructed using calls or puts.

Purpose

• Short Call Butterfly

• Using calls, the short butterfly can be constructed by writing one lower striking in-the-money call, buying two at-the-money calls and writing another higher striking out-of-the-money call, giving the trader a net credit to enter the position.

Purpose

• The timing of buying short butterfly

- Investors expect that the variation in prices is great.- Investors expect that the index will be upward or

downward and the profit/risk is limited.- Investors will have the benefit of the time value.

• The short spread and the bull spread of the strike price are the same spacing.

Purpose

• Risk and profit

- Its profit and risk are limited.

- It is a conservative operating strategy.

- Investors do not want to take too much risk.

- The short butterfly is a good choice.

Purpose

• Transaction Mode

- To sell a unit high strike price at the same time with a low strike price call.

- To buy two units of the call at the same price is simultaneous.

- It can be compose by all call or put.

Purpose

• Limited Profit

• Maximum profit for the short butterfly is obtained when the underlying stock price rally pass the higher strike price or drops below the lower strike price at expiration.

• If the stock ends up at the lower striking price, all the options expire worthless and the short butterfly trader keeps the initial credit taken when entering the position.

• However, if the stock price at expiry is equal to the higher strike price, the higher striking call expires worthless while the "profits" of the two long calls owned is canceled out by the "loss" incurred from shorting the lower striking call.

• Hence, the maximum profit is still only the initial credit taken.

Purpose

• Max profit

─ When the spot price closed below the lowest strike price or above the highest strike price at maturity.

– Max Profit = Net Premium Received - Commissions Paid

– Max Profit Achieved When Price of Underlying <= Strike Price of Lower Strike Short Call OR Price of Underlying >= Strike Price of Higher Strike Short Call

Purpose

• Limited Risk

- Maximum loss for the short butterfly is incurred when the stock price of the underlying stock remains unchange at expiration.

- At this price, only the lower striking call which was shorted expires in-the-money. The trader will have to buy back the call at its intrinsic value.

Purpose

• Max loss

– When the spot price close above the middle strike price at maturity.

– Max Loss = Strike Price of Long Call - Strike Price of Lower Strike Short Call - Net Premium Received + Commissions Paid

– Max Loss Occurs When Price of Underlying = Strike Price of Long Calls

Purpose

• Breakeven Point

– Upper Breakeven Point = Strike Price of Highest Strike Short Call - Net Premium Received

– Lower Breakeven Point = Strike Price of Lowest Strike Short Call + Net Premium Received

Content

• A. Max risk• B. Max profit• C. higher strike price• D. lower strike price• E. sold strike price• F. Upper Breakeven Point • G. Lower Breakeven Point • H.premium

H

Content-White Butterfly Construction

CallStrike price Transaction price Quantity

Buy 7300 94 2

Sell 7000 238 1

Sell 7600 29 1

Content

7300 (-94)

7000 (+238)

CallBuy 7300 -94

7394

CallSell 7000 +238

7238

CallBuy 7300 -94Sell 7000 +238

7000 (+144)

7300 (-156)

7144

238-94=144238-300=-62 -94 -156

Content

7300 (-94)

7600 (+29)

CallBuy 7300 -94

7394

CallSell 7600 +29

7629

CallBuy 7300 -94Sell 7600 +29

7600(+235)

7300 (-65)

7365

-94+29=-65300-65=235

Content

7000 (+79) 7600 (+79)

75217079

7300 (-221)

94x2=188188-238-29=-79or+144-65=-79

300-79=221or-156-65=-221

79

221

0

+ $

- $

stock priceat expiration

Call

Strike price

Transaction price

Buy 7300 94

Sell 7000 238

Sell 7600 29

Conclusion

Write Butterfly

Max profit 79

Max loss 221

Upper Breakeven Point 7521

Lower Breakeven Point 7079

Thank you for your attention !