the spread; that’s the lower break-even price. The other break-even is at
$73. The net short position of 100 shares resulting from assignment of the
70 call loses more as the stock rises between $70 and $75. The entire 3.00
profit realized at the $70 share price is eroded when the stock reaches $73.
Above $73, the trade produces a loss.
Kathleen’s trading objective is to profit from UPS trading between $67
and $73 at expiration. The best-case scenario is that it declines only slightly
from its price of $70.65 when the trade is established, to $70 per share.
Alternatives
Kathleen had other alternative positions she could have traded to meet her
goals. An iron butterfly with the same strike prices would have shown about
the same risk/reward picture, because the two positions are synthetically
equivalent. But there may, in some cases, be a slight advantage to trading
the iron butterfly over the long butterfly. The iron butterfly uses OTM put
options instead of ITM calls, meaning the bid-ask spreads may be tighter.
This means giving up less edge to the liquidity providers.
She could have also bought a condor or sold an iron condor. With condor-
family spreads, there is a lower maximum profit potential but a wider range
in which that maximum payout takes place. For example, Kathleen could
have executed the following legs to establish an iron condor:
Essentially, Kathleen would be selling two credit spreads: the July 60–65
put spread for 0.30 and the July 75–80 call spread for 0.35. Exhibit 10.3
shows the payout at expiration of the UPS July 60–65–75–80 iron condor.