Bullish Spread
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Traditionally traders might consider the Butterfly Spread to be a ‘neutral’ strategy – one that is used when the trader believes that the underlying being used will not move much and will remain in a relatively narrow range.
And while of course butterfly spreads do work – and work wonderfully – in such situations, butterflies can also be used if the trader believes the underlying will be making a directional move.
The thing with butterfly spreads is that you want to place the short strikes of the trade either at or as near as possible to where the underlying will be trading at expiration day. That is how and where the money is made in these trades.
So, if a trader had a directional bias on a particular underlying – and thought that it would rise up to a certain price within the time period to expiration – that trader could place a butterfly as a bullish spread.
To do so the trader would place an OTM (out of the money) butterfly trade with the short strikes sold at or near the strike price where the trader believed the underlying would be at expiration.
If the trader wanted to give himself more ‘room to be wrong’ he could place a wider butterfly – with the wings being further away from the sold short strikes – allowing his ‘profit tent’ to encompass a wider area of profitability around the sold short strikes.
If the trader had a crystal ball and was certain the underlying would wind up at a specific strike price at expiration day – he would want to sell a narrow butterfly trade – with the wings being as close to the sold strikes as possible – which would give him an enormous profit with very little risk in the trade – as long as of course, his crystal ball was right.
