Butterfly Trade with Adjustments

Let’s look at a different way of handling a butterfly spread that involves an adjustment that is made somewhat later in the trade. This approach will cater to a more volatile stock whose price tends to make dramatic swings between price extremes during the timeframe of a few months.

  • Example 2. In early July, suppose XYZ is trading near $30, but there is an indication that it may be moving up in the near future. Set up a butterfly spread to initially focus on the $35 level.

    Trade:

    Buy 1 Nov 40 put for $9.90 per share. Cost = 9.90 × 100 = $990.

    Sell 2 Nov 35 puts for $4.60 per share. Credit = 4.60 × 200 = $920.

    Buy 1 Nov 30 put for $.80 per share. Cost = .80 × 100 = $80.

    Net credit = $150 [990 + 80 − 920 = 150].

    Max ...

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