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.
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