44 lines
1.9 KiB
Plaintext
44 lines
1.9 KiB
Plaintext
Chapter 10: The Butterfly Spread
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TABLE 10-1.
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Butterfly spread example.
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Current prices:
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XYZ common:
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XYZ July 50 call:
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XYZ July 60 call:
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XYZ July 70 call:
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Butterfly spread:
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Buy 1 July 50 call
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Sell 2 July 60 calls
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Buy 1 July 70 call
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Net debit
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60
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12
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6
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3
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$1 ,200 debit
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$1,200 credit
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$300 debit
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$300 (plus commissions)
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201
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The risk is limited in a butterfly spread, both to the upside and to the downside,
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and is equal to the amount of the net debit required to establish the spread. In the
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example above, the risk is limited to $300 plus commissions.
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Table 10-2 and Figure 10-1 depict the results of this butterfly spread at various
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prices at expiration. The profit graph resembles that of a ratio write, except that the
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loss is limited on both the upside and the downside. There is a profit range within
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which the butterfly spread makes money - 53 to 67 in the example, before commis
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sions are included. Outside this profit range, losses will occur at expiration, but these
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losses are limited to the amount of the original debit plus commissions.
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In accordance with more lenient margin requirements passed in 2000, the
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investment required for a butterfly spread is equal to the net debit expended, which
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is the risk in the spread. When the options expire in the same month and the strik
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ing prices are evenly spaced (the spacing is 10 points in this example), the following
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formulae can be used to quickly compute the important details of the butterfly
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spread:
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Net investment= Net debit of the spread
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Maximum profit = Distance between strikes - Net debit
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Downside break-even= Lowest strike+ Net debit
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Upside break-even= Highest strike - Net debit
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In the example, the distance between strikes is 10 points, the net debit is 3
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points (before commissions), the lowest strike used is 50, and the highest strike is 70.
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These formulae would then yield the following results for this example spread. |