Breakeven Spread
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<< Butterfly Payoff Strangle Spread >>When you look at a butterfly spread trade’s risk graph you will notice on either side of the graph (this is the triangular graph – the graph that looks like a tepee) the point at which the expiration line crosses through the 0 break even line.
On some software – like the ThinkorSwim.com option trading software platform – there may even be a colored vertical line that ‘highlights’ this area on the graph.
This area is important – especially for this breakeven spread – because it is the point at which if / when the underlying moves through on either side – the position is really no longer ‘under the tent’ – or no longer within the price range it needs to be in at expiration to be profitable.
These breakeven levels are significant when trading these option positions – and many traders use these ‘levels’ as a ‘signal’ to take some sort of management action – like adjust. They use the spread’s ‘breakeven’ marks as their ‘cue’ that the position in now in danger – and something must be done to widen or move the tent to keep the underlyings current price contained in an effort to keep the option position profitable.
