Standard Butterfly Trade

Let’s consider an example of the standard butterfly trade:

  • Example 1. In early July, XYZ stock is trading at $30 per share. Your feeling is that over the next four to five months, this stock is going to move sideways. To focus on the $30 price with plenty of leverage, you initiate the following butterfly trade.

    Trade:

    Buy 1 Nov 25 call for $6.30 per share. Cost = 6.30 × 100 = $630.

    Sell 2 Nov 30 calls for $2.80 per share. Credit = 2.75 × 200 = $560.

    Buy 1 Nov 35 call for $.60 per share. Cost = .60 × 100 = $60.

    Net cost = $130 [630 + 60 − 560 = 130].

    Max risk = $130.

See Figure 23-1 for a risk graph that depicts this trade.

Figure 23-1.

The butterfly trade derives its name from the appearance of its ...

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