Butterfly Spread

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photo credit: timlewisnm

When trying to understand a more complex options strategy, many times I find it easier to ‘reverse engineer’ the position, break it apart into pieces -understand what exactly those pieces are that make up the trade, then put them all back together again.

For example, an alternate way to look at the Iron Butterfly Spread is break the position apart and realize that this trade is actually just the Sale of a Straddle.

For example, the original iron butterfly position might look something like this:

Buy 1 35 Put
Sell 1 40 Put
Sell 1 40 Call
Buy 1 45 Call

However, when we break it apart, we could say that this trade is simply a butterfly straddle - or a sale of a straddle…

Sell 1 40 Straddle

and the purchase of a strangle…

Buy 1 35/45 strangle.

The sale of the 40 straddle is what the trader is utilizing to bring in the income.

The purchase of the 35/45 strangle is used as protective wings.

Technorati Tags: Butterfly Option, Butterfly Spread, butterfly straddle, Credit Spread, Iron Condor

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