Short Call and Put Butterfly

What is a short call and put butterfly?

A short straddle and iron butterfly both have the same goal for stock to land exactly at a certain price at expiration. all options spread along with butterfly or iron butterfly may be reversed to shorten the opposite payout structure. The butterfly state created through the use of all the same type of option would be considered a short call or short put butterfly.in this case the trade would basically be the opposite transactions of their long counterparts.

When looking at the payout structure or out diagram the payout of along butterfly is very similar to the payout of the shot yesterday at least in the center of the butterfly spread. conversely, the payout for the center of a short butterfly will look very similar to the payout diagram that is created when a long straddle is initiated.

The first short butterfly to investigate is the short call butterfly. A short call butterfly is a combination of the same three options that would constitute an opposite long call butterfly. once again the middle of sons is traded in twice as many contracts as what did it on the outside strike price. however this time the middle contact is purchased and the outside strike option or wings are sold. for instant, short call butterfly may consist of a fine 2:30 strike call option while selling 25 strike calls and 35 strike calls. the construction of the spread is exactly the opposite of the long counterpart. the exemptions for this spread involve 50 days to April expirations implied volatility on this option involved at 35% and an underlying stock price of 45.

The output results in a short call butterfly being initiated for a credit of the ABC April 40 and ABC April 50 call option are sold for a total income of 6.35 (5.60+0.75), wild 2 of the ABC April 45 call option are purchased for a total cost of 4.70 (2.35 each). The result is a credit of 1.65 traders' accounts. another significant difference between the long counterpart to this trade is that the short call butterfly actually results in a credit for traders' accounts. when options are sold there is a credit therefore as this trait brings in credit it may be considered short.

The maximum loss for short call butterfly occurs if the stock settles right at the middle strike price of the spread. In the case of the ABC April 40/45/50 short call butterfly, this would be with ABC at 45 at expression. If this word to occur both the 245 calls and 50 call would expect with no value. The ABC April 40 call would be both 5 but the spirit is this option so desperate would be 5 against the trader. Subtracting the credit received for this trade 1.65 results in a maximum loss of 3.35 with ABC head 45 at expiration.there are two break-evens and areas of maximum gain for this spread. the break-even level for this trade would involve off various move  to 40 1.65 for police move to 8.35. these levels are determined by combining the outside strike price and the credit received from initiating the trade. For the lower break-even level, the credit is added to the strike and for the higher break-even level, the credit is subtracted from the highest strike price.

Finally, the maximum gain for this speed occurs if the stock settles at or below the lower strike price or at or above the higher strike price. the math behind these two-level where is slightly but the result is the same in both cases.

Short put butterfly

The shot put butterfly is very similar to the short call butterfly both positions will be initiated with a credit to an account and each of these expresses has a very similar payout structure.also its speed is constructed by purchasing twice as many of the middle strikes of son as are sold on each of the wings.

An example of the shot put the butterfly the price and the options display a word used. November option with 50 days to expiration with an implied volatility of 35% are priced out using of calculator

The underlying stock is trading at 70 which is also a strike of the middle option in the spread. The XYZ November 65/ 70/ 75shot put butterfly the 65 and 75 put option would be sold for all net credit of 6. Wild to of the XYZ number 70 put would be purchased for a cost of net credit for this spirit would be 1.60 which also net credit for this spirit would be 1.60 which also is a maximum potential profit of this trade.

As mentioned before 1.60 is the maximum potential profit of this trade and this occurs at any price above 75 or below 65 at expiration in both of these cases the spirit which has no value like the short call butterfly. however, the level where there is no value due to all options being out of the money is higher than the upper strike price in this spread.

The maximum loss for the state is 3.40 which occur if the stock settled directly on the middle strike price of 70 at expiration. once again the math is slightly different when determining the value of this is played at that price. the 65 and 70 put option expire which no value, if XYZ is at 78 expiration the only option that is in the money, is the higher strike xyz November 75 put. In the case of the short call spread the lower strike option would be the only option that in the money. The xyz November 75 foot would have 5.0 off value. As the spirit of shock this option that would be a debit of 52 for trader which is offset by the credit 1.60 received to enter the spread.