Fx options flies
A butterfly spread is a neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration but three different strike prices to create options range of prices the strategy can profit from.
The trader sells two option contracts at the middle strike price and buys one option contract flies a lower strike price and one option contract at a higher strike price. Both puts and calls can be used for a butterfly spread.
Butterfly spreads have limited riskand the options losses that occur are the cost of your original investment. The highest return you can earn occurs when the price of the underlying flies is exactly at the strike price of the middle options.
Option trades of this type are structured to have a high chances of earning a profit, albeit a small profit. A long position in a butterfly spread will earn profit if the future volatility of the underlying stock price is lower than the implied volatility. A options position in a butterfly spread will earn a profit when the future volatility of the underlying stock price is higher than the implied volatility.
By selling short two call options at a given strike price, and buying one call option at an upper and one at a lower strike price often called the wings of the butterflyan investor is in a position to earn a profit if the underlying asset flies a certain price point at expiration. A critical step in constructing a proper butterfly spread is that the wings of the butterfly must options equidistant from the middle strike flies.
The amount of premium paid flies enter the position is key. Dictionary Term Of The Day. A statistical technique used to measure options quantify the level of financial risk Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam.
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