In options trading, a long butterfly (sometimes simply butterfly) is a name given to a combination trade that results in the following net position:
-
Long 1 call at (X − a) strike
-
Short 2 calls at X strike
-
Long 1 call at (X + a) strike
Expiration Date of Butterfly options
They are all having the same expiration date. At expiration if the underlying is below X−a or above X+a then the position will be worth zero, and it will be worth a positive amount between these two values. The shape of a payoff function is just like an upside-down V, and the maximum payoff occurs at X. 
The price of a butterfly is always non-negative since the payoff is sometimes zero, sometimes positive.
Other ways of Creating Butterfly Options
A butterfly can also be created as follows:
and this is equivalent to the call version since the traders are able to verify it via put–call parity.
[click to continue…]
Tagged as:
bear put spread,
bear spread,
bull put spread,
bull spread,
butterfly payoff,
butterfly spread,
Credit spread,
currency trading,
Debit spread,
Expiration Date of Butterfly options,
Iron condor,
long butterfly,
long put butterfly,
Short butterfly,
unbalanced butterfly
In finance, when an investor simultaneously buys an option with a higher premium and sells an option with a lower premium then it results into a debit spread, AKA net debit spread. The investor is referred to as a net buyer and expects the premiums of the two options (the spread) to widen.
Bullish & Bearish Debit Spreads
Debit spreads are needed by the investors to widen for profit.
Calls can be used to construct a bullish debit spread.
Puts can be used to construct a bearish debit spread.
[click to continue…]
Tagged as:
AKA net debit spread,
bearish debit spread,
bull-bear phase spread,
Bullish & Bearish Debit Spreads,
bullish debit spread,
Debit spread,
difference in premiums,
difference in strike prices,
For call spreads breakeven,
For put spreads breakeven,
higher premium,
investor,
Maximum Gain,
Maximum Loss,
Maximum Potential,
net buyer,
option,
the spread
