Unbalanced Butterfly Trade

Let’s consider an example of an unbalanced butterfly trade:

  • Example 3. In early July, the ZYX index is trading at $150 per share. Your feeling is that, over the next two months, this index is going to move sideways with a slight bias toward also moving higher. To focus on the $150 price while also allowing for upward movement, you initiate an unbalanced butterfly trade.

    Trade:

    Buy 1 Aug 145 put for $1.40 per share. Cost = 1.40 × 100 = $140.

    Sell 2 Aug 150 puts for $3.20 per share. Credit = 3.20 × 200 = $640.

    Buy 1 Aug 152.50 put for $4.50 per share. Cost = 4.50 × 100 = $450.

    Net credit = $50 [640 − 140 − 450 = 50].

    Max risk = $200.

See Figure 23-4 for a risk graph that depicts this trade.

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 live online training, plus books, videos, and digital content from nearly 200 publishers.