Butterfly
The butterfly strategy is just one of many that you can learn about by obtaining a BetterTrades
options trading education. This is a generally neutral stock option trading strategy that offers
limited risk and limited rewards.
How it works: Find a stock that's been trading in a narrow range or has been stagnant. You then
A) sell two calls at the money, B) buy one call one strike price in the money and C) buy one call
one strike price out of the money. You will be most profitable if the stock remains at the same price.
Example: You have found a stock that has been flat at $75. To enter a butterfly position, you A)
sell two $75 calls for $6, B) Buy one $70 call for $9, and C) buy the $80 call for $4. Selling the
two calls would bring in a credit of $1,200. Buying the $75 call would cost $900 and buying the $80
call would cost $400, leaving the trade with a $100 debit to open.
If the stock remained at $75, the $75 and $80 calls would expire worthless and the $70 call would
be worth $500 (the difference between the $75 and $70 strike prices). That would leave you with a
maximum profit of $400.
A trader would break even if the stock dropped to $71 or rose to $79. The maximum loss if the stock
price dropped below $70 or above $80 would be $100, as the buyer would keep the premium received
when the trade opened and lose the value of the two calls, which would expire worthless.
The payoff: The stock that marks time will make the most money.
The drawback: Volatility will hurt this trade. If it moves dramatically, either up or down, you lose.
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