17 lines
1.1 KiB
Plaintext
17 lines
1.1 KiB
Plaintext
Long Butterfly Example
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A trader, Kathleen, has been studying United Parcel Service (UPS), which
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is trading at around $70.65. She believes UPS will trade sideways until July
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expiration. Kathleen buys the July 65–70–75 butterfly for 2.00. She
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executes the following legs:
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Kathleen looks at her trade as two vertical spreads, the 65–70 bull (debit)
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call spread and the 70–75 bear (credit) call spread. Intuitively, she would
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want UPS to be at or above $70 at expiration for her bull call spread to have
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maximum value. But she has the seemingly conflicting goal of also wanting
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UPS to be at or below $70 to get the most from her 70–75 bear call spread.
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The ideal price for the stock to be trading at expiration in this example is
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right at $70 per share—the best of both worlds. The at-expiration diagram,
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Exhibit 10.1 , shows the profit or loss of all possible outcomes at expiration.
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EXHIBIT 10.1 UPS 65–70–75 butterfly.
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If the price of UPS shares declines below $65 at expiration, all these calls
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will expire. The entire 2.00 spent on the trade will be lost. If UPS is above
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$65 at expiration, the 65 call will be ITM and will be exercised. The call |