Chapter 10: The Butterfly Spread 205 
may differ somewhat from closing prices. Normally, this difference is small, but since 
there are three different calls involved in a butterfly spread, the difference could be 
substantial. Therefore, it is usually necessary to check the appropriate bid and asked 
price for each call before entering the spread, in order to be able to place a reason­
able debit on the order. As with other types of spreads, the butterfly spread order can 
be placed as one order. 
Before moving on to discuss follow-up action, it may be worthwhile to describe 
a tactic for stocks with 5 points between striking prices. For example, the butterfly 
spreader might work with strikes of 45, 50, and 60. If he sets up the usual type of but­
terfly spread, he would end up with a position that has too much risk near 60 and very 
little or none at all near 45. If this is what he wants, fine; but if he wants to remain 
neutral, the standard type of butterfly spread will have to be modified slightly. 
Example: The following prices exist: 
XYZ common, 50; 
July 45 call, 7; 
July 50 call, 5; and 
July 60 call, 2. 
The normal type of butterfly spread- buying one 45, selling two 50's, and buying one 
60 - can actually be done for a credit of 1 point. However, the profitability is no 
longer symmetric about the middle striking price. In this example, the investor can­
not lose to the downside because, even if the stock collapses and all the calls expire 
worthless, he will still make his I-point credit. However, to the upside, there is risk: 
If XYZ is anywhere above 60 at expiration, the risk is 4 points. This is no longer a neu­
tral position. The fact that the lower strike is only 5 points from the middle strike 
while the higher strike is 10 points away has made this a somewhat bearish position. 
If the spreader wants to be neutral and still use these striking prices, he will have to 
put on two bull spreads and only one bear spread. That is, he should: 
Buy 2 July 45's: 
Sell 3 July 50's: 
Buy 1 July 60: 
$1,400 debit 
$1,500 credit 
$200 debit 
This position now has a net debit of $100 but has a better balance of risk at either 
end. If XYZ drops and is below 45 at expiration, the spreader will lose his $100 ini­
tial debit. But now, if XYZ is at or above 60 at expiration, he will lose $100 in that 
range also. Thus, by establishing two bull spreads with a 5-point difference between