Variations of the Butterfly Spread


Visitors: 670

The Iron Butterfly spread, as the name implies, is a variation of the butterfly spread. The “iron" terminology part of all spread strategies means to widen the range of the protective strangle purchased.

By purchasing the protective “wings" of the spread further out-of-the-money, the overall net credit received for selling the spread (that is to say, the potential profit) is increased, although with correspondingly increased risk of the overall position. Gee, increased reward/increased risk! No surprises there.

However, widening the range of the spread also offers possibilities for “rolling" the position up or down as a follow-up action, if needed, without disturbing the protective wings of the spread. Increased flexibility. Nice.

The Condor spread is also a variation of the butterfly spread.

Think of it as selling an expensive strangle while buying a cheaper one. The entire position is put on for a net credit.

Because the strategist is selling a strangle, rather than a straddle, the condor spread takes in less credit than the butterfly but has a broader profit range.

The ideal time to put on this spread is when the stock is trading mid-way between strikes.

For example, if a stock were trading at 47.50, the strategist would sell the 50 calls and the 45 puts and buy the 55 calls and the 40 puts.

The maximum profit range would be between the strikes of the options sold, 45 and 50 in this example.

The break-even points would be at 45 minus the credit received and at 50 plus the credit received.

The maximum loss points would be at 40 on the downside and 55 on the upside.

Because No One Cares More About Your Money Than You

Good trading,

Don Heggen


Article Source:

Rate this Article: 
Variations Explained
Rated 4 / 5
based on 5 votes

Related Articles:

The Butterfly Spread

by: Don Heggen (July 07, 2006) 
(Finance/Stocks Mutual Funds)

Spread Your Wings With Beautiful Butterfly Tattoo Designs

by: Jennifer Langston (July 25, 2008) 
(Arts and Entertainment)

Celtic Butterfly Tattoos - Unique Twist on Popular Butterfly Design

by: Tatum Tyler (September 05, 2008) 
(Arts and Entertainment)

The Secrets of Good (and Bad) Spread Trading When Time Really Means Money For ..

by: Andy Richardson (June 21, 2008) 
(Investing/Day Trading)

Tribal Butterfly Tattoo Designs Where to Find the Best Tribal Butterfly Designs

by: Cory Sanders (June 28, 2008) 
(Arts and Entertainment)

Abdominoplasty Variations

by: Patricia Woloch (January 24, 2008) 
(Health and Fitness)

Variations on a Theme

by: Gurmeet Mattu (July 08, 2008) 
(Writing and Speaking/Writing)

The Three Variations of Mesothelioma

by: Joseph Devine (July 19, 2008) 
(Cancer/Lung Mesothelioma Asbestos)

Goldfish Variations

by: Allen Jesson (November 16, 2006) 
(Home and Family)

Variations Explained

by: Paul J Johnson (October 24, 2006) 
(Health and Fitness)