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 ...

Get Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks now with the O’Reilly learning platform.

O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.