Like the volatility positions we have looked at so far, the Short Butterfly position will realize a profit if the market makes a substantial move. It also uses a combination of puts and calls to achieve its profit/loss profile - but combines them in such a manner that the maximum profit is limited.
You are short the September 40-45-50 butterfly with the underlying at 45. You: you are neutral but want the market to move in either direction.
The position is a neutral one - consisting of two short options balanced out with two long ones.
Which of these positions is a short butterfly spread? The graph on the left.
The profit loss profile of a short butterfly spread looks like two short options coming together at the center Calls.
The spread shown above was constructed by using 1 short call at a low exercise price, two long calls at a medium exercise price and 1 short call at a high exercise price.
Your potential gains or losses are: limited on both the upside and the downside.
Say you had build a short 40-45-50 butterfly. The position would yield a profit only if the market moves below 40 or above 50. The maximum loss is also limited.
You are short the September 40-45-50 butterfly with the underlying at 45. You: you are neutral but want the market to move in either direction.
The position is a neutral one - consisting of two short options balanced out with two long ones.
Which of these positions is a short butterfly spread? The graph on the left.
The profit loss profile of a short butterfly spread looks like two short options coming together at the center Calls.
The spread shown above was constructed by using 1 short call at a low exercise price, two long calls at a medium exercise price and 1 short call at a high exercise price.
Your potential gains or losses are: limited on both the upside and the downside.
Say you had build a short 40-45-50 butterfly. The position would yield a profit only if the market moves below 40 or above 50. The maximum loss is also limited.
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