Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks

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.

[View full size image]

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