Chapter 10: Tire Butterfly Spread 207 
can estimate that the commission cost for each option is about 1/s point. That is, if one 
has 10 butterfly spreads and the spread is currently at 6 points, he could figure that 
he would net about 5½ points after commissions to close the spread. This 1/s estimate 
is only valid if the spreader has at least 10 options at each strike involved in a spread. 
Normally, one would not close the spread early to limit losses, since these loss­
es are limited to the original net debit in any case. However, if the original debit was 
large and the stock is beginning to break out above the higher strike or to break down 
below the lower strike, the spreader may want to close the spread to limit losses even 
further. 
It has been repeatedly stated that one should not attempt to ''leg" out of a 
spread because of the risk that is incurred if one is wrong. However, there is a 
method of legging out of a butterfly spread that is acceptable and may even be pru­
dent. Since the spread consists of both a bull spread and a bear spread, it may often 
be the case that the stock experiences a relatively substantial move in one direction 
or the other during the life of the butterfly spread, and that the bull spread portion 
or the bear spread portion could be closed out near their maximum profit potentials. 
If this situation arises, the spreader may want to take advantage of it in order to be 
able to profit more if the underlying stock reverses direction and comes back into the 
profit range. 
Exampk: This strategy can be explained by using the initial example from this chap­
ter and then assuming that the stock falls from 60 to 45. Recall that this spread was 
initially established with a 3-point debit and a maximum profit potential of 7 points. 
The profit range was 53 to 67 at July expiration. However, a rather unpleasant situa­
tion has occurred: The stock has fallen quickly and is below the profit range. If the 
spreader does nothing and keeps the spread on, he will lose 3 points at most if the 
stock remains below 50 until July expiration. However, by increasing his risk slightly, 
he may be able to improve his position. Notice in Table 10-3 that the bear spread por­
tion of the overall spread - short July 60, long July 70 - has very nearly reached its 
maximum potential. The bear spread could be bought back for ½ point total (pay 1 
point to buy back the July 60 and receive½ point from selling out the July 70). Thus, 
the spreader could convert the butterfly spread to a bull spread by spending ½ point. 
What would such an action do to his overall position? First, his risk would be 
increased by the ½ point spent to close the bear spread. That is, if XYZ continues to 
remain below 50 until July expiration, he would now lose 3½ rather than 3 points, 
plus commissions in either case. He has, however, potentially helped his chances of 
realizing something close to the maximum profit available from the original butterfly 
spread.