initial debit). If we distribute the 0.90 profit over the 2.50 move from
$33.50 to $36, the butterfly gains about 0.36 per dollar move in Walgreen
Co. (0.90/(36 − 33.50). This implies a delta of about 0.36.
But the delta, with 31 days until expiration and Walgreen Co. at $33.50, is
only 0.008, and because of negative gamma this delta will get even smaller
as Walgreen Co. rises. Butterflies, like the vertical spreads of which they are
composed, can profit from direction but are never purely directional trades.
Time is always a factor. It is theta, working in tandem with delta, that
contributes to profit or peril.
A bearish butterfly can be constructed as well. One would execute the
trade with all OTM puts or all ITM calls. The concept is the same: sell the
guts at the strike at which the stock is expected to be trading at expiration,
and buy the wings for protection.