204 
XYZ common, 70; 
XYZ July 50, 20; 
XYZ July 60, 12; and 
XYZ July 70, 5. 
Part II: Call Option Strategies 
The butterfly spread would require a debit of only $100 plus commissions to estab­
lish, because the cost of the calls at the higher and lower strike is 25 points, and a 24-
point credit would be obtained by selling two calls at the middle strike. This is indeed 
a low-cost butterfly spread, but the stock will have to move down in price for much 
of a profit to be realized. The maximum profit of $900 less commissions would be 
realized at 60 at expiration. The strategist would have to be bearish on XYZ to want 
to establish such a spread. 
Without the aid of an example, the reader should be able to determine that if 
XYZ were originally at 50, a low-cost butterfly spread could be established by buying 
the 50, selling two 60's, and buying a 70. In this case, however, the investor would 
have to be bullish on the stock, because he would want it to move up to 60 by expi­
ration in order for the maximum profit to be realized. 
In general, then, if the butterfly spread is to be established at an extremely low 
debit, the spreader will have to make a decision as to whether he wants to be bullish 
or bearish on the underlying stock. Many strategists prefer to remain as neutral as 
possible on the underlying stock at all times in any strategy. This philosophy would 
lead to slightly higher debits, such as the $300 debit in the example at the beginning 
of this chapter, but would theoretically have a better chance of making money 
because there would be a profit if the stock remained relatively unchanged, the most 
probable occurrence. 
In either philosophy, there are other considerations for the butterfly spread. 
The best butterfly spreads are generally found on the more expensive and/or more 
volatile stocks that have striking prices spaced 10 or 20 points apart. In these situa­
tions, the maximum profit is large enough to overcome the weight of the commission 
costs involved in the butterfly spread. When one establishes butterfly spreads on 
lower-priced stocks whose striking prices are only 5 points apart, he is normally put­
ting himself at a disadvantage unless the debit is extremely small. One exception to 
this rule is that attractive situations are often found on higher-priced stocks with 
striking prices 5 points apart (50, 55, and 60, for example). They do exist from time 
to time. 
In analyzing butterfly spreads, one commonly works with closing prices. It was 
mentioned earlier that using closing prices for analysis can prove somewhat mislead­
ing, since the actual execution will have to be done at bid and asked prices, and these