To The Moon

A Butterfly Spread is a debit vertical spread AND a credit vertical spread, same stock, all calls or all puts, same expiry.

Example. XYZ is trading at $48. You think it may go up 15% (~$55).

Trade: Buy one 50 strike call at $3, sell TWO 55 strike calls at $1.50 each, buy one 60 strike call at $0.50. Total outlay and risk is $0.50. Expiry for all is 60-days.

Look at is as owning one 50–55 call debit spread, and short one 55–60 call credit spread.

Breakeven points are $50.50 and $59.50. Everything in-between is a profit. Max gain, if the stock lands at $55 is $4.50 (50 strike call you own is $5 In-The-Money, 55 calls and 60 call expire worthless, position cost you $0.50 to initiate).

AnIron Condoris a call vertical spread AND a put vertical spread, same stock, same expiry.

XYZ is trading at $48, I think the stock should remain between $45 and $55 by expiration.

Trade: Sell the 45–40 put vertical spread for $1 credit. Sell the 55–60 call credit spread at $0.60. Total credit to you is $1.60.

At expiry, if shares between $45 and $55 everything expires, you retain $1.60. Breakeven points are $43.40 and $56.60.

If the stock goes lower you are short the 45 strike put, Below $43.40, the 45 put less $1.60 total credit, you have risk to $40. Below $40 your total risk is the difference in strikes, $5, less the $1.60 credit.

If the stock goes higher you are short the 55 strike call, Above $56.60, the 55 call plus the $1.60 total credit, you have risk to $60. Above $60 your total risk is the difference in strikes, $5, less the $1.60 credit or $3.40.

The butterfly and Iron Condor look similar on a P&L, make money if the stock goes to or stays in the middle, you lose on a sharp move in either direction. The Butterfly is initiated as a debit, the Iron Condor is a credit. I know, someone could sell a Butterfly or buy an Iron Condor, 99% of investors or traders do not. Both are commission intensive (if you pay commissions)

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