Long Butterfly Spread Example and All Details Explained

<div><img width="1200" height="665" src="https://6ztkp25f.tinifycdn.com/wp-content/uploads/2023/09/Long-Butterfly-Spread.jpeg" class="attachment-post-thumbnail size-post-thumbnail wp-post-image" alt="Long Butterfly Spread Example and All Details" decoding="async" loading="lazy" /></div><h1><strong><span data-preserver-spaces="true">Long Butterfly Spread Example and All Details Explained</span></strong></h1>
<p><span data-preserver-spaces="true">Have you recently wondered what the Long Butterfly Spread example and details stand for? Why is it so essential for you as a trader to understand the main factors of this very much-traded strategy? </span></p>
<p><span data-preserver-spaces="true">And where to start with this whole story about the butterfly spread options and so on? Spreads, in the first place, as a term in finance, represent the diversion or opening among two particular rates, prices or yields. </span></p>
<p><span data-preserver-spaces="true">You’ve probably heard about the “bid-ask spread”, the most commonly used one and the opening among buyers and sellers’ security or asset prices.</span></p>
<p><span data-preserver-spaces="true">However, those who are eager to learn more about the butterfly spread strategy should get all the basic information and find out what the Long Butterfly spread example and all the details </span></p>
<p><span data-preserver-spaces="true">are about! </span></p>
<p><span data-preserver-spaces="true">Let’s get started from the core basics of it, shall we?</span></p>
<h2><strong>What does a Long Butterfly Spread mean? </strong></h2>
<p><span data-preserver-spaces="true">Long Butterfly spread, using call options, represents a tri-component approach. It involves purchasing one call with a lower strike, selling two calls at a medium strike, and buying one at a higher strike. </span></p>
<p><span data-preserver-spaces="true">Every call has an identical expiration date, and their strikes are evenly spaced. For instance, one might buy a 95 Call, sell two 100 Calls, and buy a 105 Call. </span></p>
<p><span data-preserver-spaces="true">This tactic is set up for a net cost, capping potential gains and risks. The highest profit is achieved in case the price of a stock matches the middle strike price at expiration. </span></p>
<p><span data-preserver-spaces="true">The utmost risk equals the overall expense of the setup, including fees, and occurs if the stock price surpasses the greatest strike or falls under the lowest strike at expiry.</span></p>
<h3><strong><span data-preserver-spaces="true">What does this technique offer?</span></strong></h3>
<p><span data-preserver-spaces="true"><img decoding="async" loading="lazy" class="alignnone size-full wp-image-228857" src="https://6ztkp25f.tinifycdn.com/wp-content/uploads/2023/09/shutterstock_1931406863.jpg" alt="trading" width="1000" height="667" /></span></p>
<p><span data-preserver-spaces="true">This advanced technique typically offers limited monetary gain due to high associated expenses. The three diverse strike prices mean multiple fees and three bid-ask spreads when initiating and exiting the position. </span></p>
<p><span data-preserver-spaces="true">Therefore, executing this strategy at favourable prices is crucial to maintaining a satisfactory risk/reward balance, including commissions.</span></p>
<h3><strong><span data-preserver-spaces="true">Maximum Profit – Explained</span></strong></h3>
<p><span data-preserver-spaces="true">The highest possible gain is the difference between the lower and middle strike prices minus all the setup costs and fees. You get this gain in case the price of a stock is the same as the middle strike price when the calls expire.</span></p>
<p><span data-preserver-spaces="true">For instance, with a $5.00 gap between the lower and middle strike prices and a setup cost of $1.25 (not counting fees), the top profit is $3.75, minus any additional fees.</span></p>
<h3><strong><span data-preserver-spaces="true">Maximum Risk – Explained</span></strong></h3>
<p><span data-preserver-spaces="true">The biggest risk is the total cost of setting up the position, including any fees. You will face this loss in two situations. First, if the <a href="https://www.financebrokerage.com/defensive-stocks/">stock</a> price gets beneath the lowest strike price at expiration, all the calls will be worthless, and you will lose the total setup cost, including fees. </span></p>
<p><span data-preserver-spaces="true">Second, if the stock price exceeds the biggest strike price at expiration, all calls will have value. Still, the net worth of the Butterfly spread will be zero at expiration, again causing a loss exact to the entire setup cost, including fees.</span></p>
<h2><strong>What is the best example of Long Butterfly Spread with Calls?</strong></h2>
<p><span data-preserver-spaces="true">If you’re wondering what’s the best long call butterfly spread example, here’s the perfect one:</span></p>
<ul>
<li><span data-preserver-spaces="true">Purchase 1 ABC 90 call for 5.50 (cost: 5.50)</span></li>
<li><span data-preserver-spaces="true">Sell 2 ABC 95 calls for 2.75 each (credit: 5.50)</span></li>
<li><span data-preserver-spaces="true">Purchase 1 ABC 100 call for 1.20 (cost: 1.20)</span></li>
<li><span data-preserver-spaces="true">Total cost = (loss: 1.20)</span></li>
</ul>
<h2><strong>What Are the Main Characteristics of a Butterfly Spread?</strong></h2>
<p><span data-preserver-spaces="true"><img decoding="async" loading="lazy" class="alignnone wp-image-228850 size-full" src="https://6ztkp25f.tinifycdn.com/wp-content/uploads/2023/09/shutterstock_2014187012.jpg" alt="long butterfly spread example" width="1000" height="615" /></span></p>
<p><span data-preserver-spaces="true">A butterfly spread strategically employs four option contracts, each sharing the same expiration date but differentiated by three unique strike prices: higher, middle (at the money), and lower. </span></p>
<p><span data-preserver-spaces="true">This structured alignment includes equal distance from the upper strike price and lower to the centre strike prices. </span></p>
<p><span data-preserver-spaces="true">For instance, in constructing a long call butterfly spread, one buys an in-the-money call option and an out-of-the-money call option with varied strike prices while concurrently selling two at-the-money call options. </span></p>
<h3><strong><span data-preserver-spaces="true">When does this arrangement culminate?</span></strong></h3>
<p><span data-preserver-spaces="true">This arrangement culminates in a net debt upon initiation. The max profit is unlocked when the underlying asset’s price at expiration coincides with the pricing of the short, call or put, centre strike prices. </span></p>
<p><span data-preserver-spaces="true">Similar in structure but using put options is the long put Butterfly spread. Both the calls and put options strategies yield comparable profit and loss dynamics. </span></p>
<p><span data-preserver-spaces="true">Contrarily, the short iron butterfly approach employs both calls and puts, creating an intricate balance that also thrives within specific price movements of the underlying asset, emphasizing the significance of the upper and centre strike prices in determining outcomes.</span></p>
<h2><strong>What are the types of Butterfly Spreads?</strong></h2>
<p><span data-preserver-spaces="true">Here are all the common types of Butterfly spreads you need to be aware of:</span></p>
<h3><strong><span data-preserver-spaces="true">Long Call Butterfly Spread</span></strong></h3>
<ul>
<li><span data-preserver-spaces="true">Setup: Buy a low-strike call, sell two middle-strike calls, and buy a high-strike call.</span></li>
<li><span data-preserver-spaces="true">Cost: Starts with a debt.</span></li>
<li><span data-preserver-spaces="true">Profit: Maximized if the ending price equals the middle strike price. </span></li>
<li><span data-preserver-spaces="true">Loss: Limited to the premiums and fees paid.</span></li>
</ul>
<h3><strong><span data-preserver-spaces="true">Long Put Butterfly Spread</span></strong></h3>
<ul>
<li><span data-preserver-spaces="true">Setup: Buy low and high-strike puts and sell two middle-strike puts.</span></li>
<li><span data-preserver-spaces="true">Cost: Starts with a debt.</span></li>
<li><span data-preserver-spaces="true">Profit**: Maximized if the ending price is the middle strike.</span></li>
<li><span data-preserver-spaces="true">  Loss: Limited to the premiums and fees paid.</span></li>
</ul>
<h3><strong><span data-preserver-spaces="true">Short Call Butterfly Spread</span></strong></h3>
<p><span data-preserver-spaces="true"><img decoding="async" loading="lazy" class="alignnone wp-image-228814 size-full" src="https://6ztkp25f.tinifycdn.com/wp-content/uploads/2023/09/shutterstock_1471328201.jpg" alt="long butterfly spread example" width="1000" height="563" /></span></p>
<ul>
<li><span data-preserver-spaces="true">Setup: Sell a low-strike call, buy two middle-strike calls, sell a high-strike call.</span></li>
<li><span data-preserver-spaces="true">Credit: Begins with a credit.</span></li>
<li><span data-preserver-spaces="true">Profit: Max if the ending price is above the high or below the low strike.</span></li>
<li><span data-preserver-spaces="true">Loss Middle minus low strike, less received premiums.</span></li>
</ul>
<h3><strong><span data-preserver-spaces="true">Short Put Butterfly Spread</span></strong></h3>
<ul>
<li><span data-preserver-spaces="true">Setup: Sell a low-strike put, buy two middle-strike puts, sell a high-strike put.</span></li>
<li><span data-preserver-spaces="true">Credit: Starts with a credit.</span></li>
<li><span data-preserver-spaces="true">Profit: Max if the ending price is above the high or below the low strike.</span></li>
<li><span data-preserver-spaces="true">Loss: High minus middle strike, less received premiums.</span></li>
</ul>
<h3><strong><span data-preserver-spaces="true">Iron Butterfly Spread</span></strong></h3>
<ul>
<li><span data-preserver-spaces="true">Setup: Buy a low-strike put, sell a middle-strike put and call, and buy a high-strike call.</span></li>
<li><span data-preserver-spaces="true">Credit: Begins with a credit.</span></li>
<li><span data-preserver-spaces="true">Profit: Max if the ending price is the middle strike.</span></li>
<li><span data-preserver-spaces="true">Loss: High minus middle strike, minus received premiums.</span></li>
</ul>
<h3><strong><span data-preserver-spaces="true">Reverse Iron Butterfly Spread</span></strong></h3>
<ul>
<li><span data-preserver-spaces="true">Setup: Sell a low-strike put, buy a middle-strike put and call, sell a high-strike call.</span></li>
<li><span data-preserver-spaces="true">Cost: Starts with a debt.</span></li>
<li><span data-preserver-spaces="true">Profit: Max if the ending price is above the high or below the low strike.</span></li>
<li><span data-preserver-spaces="true"> Loss: Limited to total premiums paid.</span></li>
</ul>
<h2><strong>What is the Butterfly spread payoff diagram all about?</strong></h2>
<p><span data-preserver-spaces="true"><img decoding="async" loading="lazy" class="alignnone size-full wp-image-228845" src="https://6ztkp25f.tinifycdn.com/wp-content/uploads/2023/09/shutterstock_1420640129.jpg" alt="trading" width="1000" height="667" /></span></p>
<p><span data-preserver-spaces="true">The long call butterfly payoff diagram displays risk and reward, which is crucial for understanding price movement. Like the iron butterfly options strategy, the maximum loss is defined at the start as the total initial cost of call options. </span></p>
<p><span data-preserver-spaces="true">This loss is realized if the closing price moves outside the long options, akin to options expiring worthless.</span></p>
<p><span data-preserver-spaces="true">In our example, a trader buys a call centre at $100, with upper and prices of lower strike at $110 and $90, respectively, and an entry cost of $5.00, marking the highest possible loss. </span></p>
<p><span data-preserver-spaces="true">If the stock trades at $100 at expiry, the two short call options expire worthless, leading to a profit after deducting the initial cost and option premium.</span></p>
<h3><strong><span data-preserver-spaces="true">What happens if the stock price remains within the long call “wing”?</span></strong></h3>
<p><span data-preserver-spaces="true">If the stock price remains within the long call “wing,” short calls retain value. The gain or loss is determined by selling the lower strike long option and considering the original debit.</span></p>
<p><span data-preserver-spaces="true">Below $100 at expiration, all options, except the lower long call, expire worthless, shaping the profit or loss after accounting for the initial cost, akin to the money put option in other strategies. </span></p>
<p><span data-preserver-spaces="true">The break-even point is reached when the stock price equals the long options strike prices, adjusted by the paid premium.</span></p>
<h2><strong>Conclusion</strong></h2>
<p><span data-preserver-spaces="true">In the Long Butterfly Spread with calls, a three-part plan maximizes profit with aligned strike prices. While capping gains and losses, this method demands precise execution and mindful management of associated costs to ensure a favourable risk/reward balance amidst multiple fees and bid-ask spreads.</span></p>
<h2><strong><span data-preserver-spaces="true">FAQ</span></strong></h2>
<p><strong><span data-preserver-spaces="true"><img decoding="async" loading="lazy" class="alignnone size-full wp-image-217870" src="https://6ztkp25f.tinifycdn.com/wp-content/uploads/2023/08/FAQ-1.jpg" alt="FAQ" width="1025" height="665" /></span></strong></p>
<h3><strong><span data-preserver-spaces="true">What is a long butterfly spread using call options?</span></strong></h3>
<p><span data-preserver-spaces="true">A long butterfly spread with call options is a strategy involving buying and selling call options with different strike prices but the same expiration date. It caps both potential profits and losses.</span></p>
<h3><strong><span data-preserver-spaces="true">How is a long butterfly spread set up?</span></strong></h3>
<p><span data-preserver-spaces="true">It involves buying one call with a lower strike, selling two calls with a middle strike, and buying one call with a higher strike. For example, buy a 95 Call, sell two 100 Calls, and buy a 105 Call.</span></p>
<h3><strong><span data-preserver-spaces="true">What is the maximum profit and risk in this strategy?</span></strong></h3>
<p><span data-preserver-spaces="true">The highest profit is realized if the stock price equals the middle strike price at expiration. The utmost risk is the total cost of the setup, including fees, realized if the stock price is above the highest or below the lowest strike at expiry.</span></p>
<h3><strong><span data-preserver-spaces="true">Why is it considered an advanced strategy?</span></strong></h3>
<p><span data-preserver-spaces="true">It’s considered advanced due to limited profit potential and high associated costs, including multiple fees and bid-ask spreads when both entering and exiting the position.</span></p>
<h3><strong><span data-preserver-spaces="true">How can one maintain a favorable risk/reward balance?</span></strong></h3>
<p><span data-preserver-spaces="true">It’s crucial to execute the strategy at favorable prices to ensure a satisfactory risk/reward balance, accounting for all associated commissions and fees.</span></p>
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