. 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. 
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