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+. CHAPTER 10 
+The Butterfly Spread 
+The recipient of one of the more exotic names given to spread positions, the butter­
+fly spread is a neutral position that is a combination of both a bull spread and a bear 
+spread. This spread is for the neutral strategist, one who thinks the underlying stock 
+will not experience much of a net rise or decline by expiration. It generally requires 
+only a small investment and has limited risk. Although profits are limited as well, they 
+are larger than the potential risk. For this reason, the butterfly spread is a viable strat­
+egy. However, it is costly in terms of commissions. In this chapter, the strategy is 
+explained using only calls. The strategy can also be implemented using a combination 
+of puts and calls, or with puts only, as will be demonstrated later. 
+There are three striking prices involved in a butterfiy spread. Using only calls, 
+the butterfly spread consists of buying one call at the lowest striking price, selling two 
+calls at the middle striking price, and buying one call at the highest striking price. The 
+following example will demonstrate how the butterfly spread works. 
+Example: A butterfly spread is established by buying a July 50 call for 12, selling 2 
+July 60 calls for 6 each, and buying a July 70 call for 3. The spread requires a rela­
+tively low debit of $300 (Table 10-1), although there are four option commissions 
+involved and these may represent a substantial percentage of the net investment. As 
+usual, the maximum amount of profit is realized at the striking price of the written 
+calls. With most types of spreads, this is a useful fact to remember, for it can aid in 
+quick computation of the potential of the spread. In this example, if the stock were 
+at the striking price of the written options at expiration (60), the two July 60's that are 
+short would expire worthless for a $1,200 gain. The long July 70 call would expire 
+worthless for a $300 loss, and the long July 50 call would be worth 10 points, for a 
+$200 loss on that call. The sum of the gains and losses would thus be a $700 gain, less 
+commissions. This is the maximum profit potential of the spread. 
+200