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Option traders can create butterfly spread with puts as well as with calls.
In the case of the ‘Standard’ butterfly spread – these trades are usually created utilizing only all call options or all put options. What is meant by this is the the three different legs of these trades are positioned at different strikes of course – however they are comprised of either all calls or all puts. Also, either way they are constructed, the risk diagram of each will look very much so the same if not exactly identical.
A different variation of the butterfly spread, called the iron butterfly – is built much like it’s ‘relative’ strategy called the iron condor. This butterfly option trade is made from both call options and put options just like the iron condor. The difference between the two is that the strikes which are sold are done so at the exact same stike on the butterfly spread – and also the wings which are purchased are usually done so a faily wide distance apart.
A Butterfly Spread is an advanced option selling strategy where the trader places a theta positive trade in an effort to take advantage of a range bound stock, commodity, or other underling.
The Butterfly Spread profits from the theta being drained from the options that were sold. At the time the trader sold the options, the trader also purchased options some distance away from the short strikes or the strikes being sold. These are sometimes referred to as ‘wings’.
There are several various butterfly option strategies – versions if you will – of the butterfly option spread strategy. These different versions are know as the call butterfly, the put butterfly, the iron butterfly, the broken wing butterfly, the modified butterfly, the skewed butterfly, and the reverse butterfly.
Option sellers are drawn to the butterfly spread for a variety or reasons, including the large amount of premium the can capture due to the fact they are selling options which are At The Money – bringing in the highest value of time premium available.
Butterfly Option Traders use the butterfly spread trade to churn a cash flow from Wall Street.
The goal of this site is to provide current and educational information and resources to other non directional trading investors who are interested in learning more about this option selling strategy.
