Chapter 10: The BatterRy Spread 209 
Long July 70 call . 
Short July 60 call - Net credit 6½ points 
This bear spread has a maximum profit potential of 6½ points anywhere below 60 at 
July expiration. The maximum risk is 3½ points anywhere above 70 at expiration. 
Thus, the original butterfly spread was again converted into a position such that a 
stock price reversal to any price below 60 could produce something close to the max­
imum profit. Moreover, the risk was only increased by an additional ½ point. 
TABLE 10-4. 
Initial spread and new current prices. 
I nitiol Spread 
XYZ common: 60 
XYZ July 50 call: 12 
July 60 call: 6 
July 70 call: 3 
SUMMARY 
Current Prices 
XYZ common: 
July 50 call: 
July 60 call: 
July 70 call: 
75 
251/2 
16 
7 
The butterfly spread is a viable, low-cost strategy with both limited profit potential 
and limited risk. It is actually a combination of a bull spread and a bear spread, and 
involves using three striking prices. The risk is limited should the underlying stock 
fall below the lowest strike or rise above the highest strike. The maximum profit is 
obtained at the middle strike. One can keep his initial debits to a minimum by ini­
tially assuming a bullish or bearish posture on the underlying stock. If he would 
rather remain neutral, he will normally have to pay a slightly larger debit to establish 
the spread, but may have a better chance of making money. If the underlying stock 
experiences a large move in one direction or the other prior to expiration, the spread­
er may want to close the profitable side of his butterfly spread near its maximum 
profit potential in order to be able to capitalize on a stock price reversal, should one 
occur.