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Butterfly Spread Trading

Butterfly Spread Trading. Butterfly Spreads. Key Points Market Posture = Neutral (sideways trend) Debit Spread Shorter Term Trade (1 – 3 weeks before expiration) - Combines Two Spreads: Bull Call Spread Bear Call Spread. Butterfly Spreads. Profit / Loss. +. Max Gain. -. +. 40.

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Butterfly Spread Trading

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  1. Butterfly Spread Trading

  2. Butterfly Spreads Key Points • Market Posture = Neutral (sideways trend) • Debit Spread • Shorter Term Trade (1 – 3 weeks before expiration) - Combines Two Spreads: • Bull Call Spread • Bear Call Spread

  3. Butterfly Spreads Profit/Loss + Max Gain - + 40 45 47 50 53 55 60 Max Loss -

  4. Butterfly Spreads Resistance 100 95 ATM 90 Support Bull Call Spread BCO 90 Strike @ 6.10 SCO 95 Strike @ 4.10 Bear Call Spread BCO 100 Strike @ 2.60 SCO 95 Strike @ 4.10

  5. The Spread Constructed BCO 1 90 @ 6.10 $610 SCO 2 95 @ 4.10 $8.20 BCO 1 100 @ 2.60 $2.60 .50 debit Maximum Gain: Spread Between Lower Strike and Middle strike – Net Debit 95 – 90 - .50 = $4.50 Maximum Loss: Debit = .50 Break Even Points First Break Even Point: Lowest Strike + Net Debit 90 + .50 = $90.50 Second Break Even Point: Highest Strike – Net Debit 100 - .50 = $99.50 Butterfly Spreads

  6. Butterfly Spreads Resistance 100 99.50 95 ATM 90.50 90 Support

  7. Butterfly Spreads Exiting the Position If your stock is: - Below Middle Strike, but Above Lowest Strike =Sell lower Strike that has Intrinsic Value, let other expire worthless - Is at the Middle Strike or slightly above= Sell lower Strike with intrinsic value, buy back the ATM’s, let the higher strike expire worthless - Below or above Your Wings =Lick your Wounds and poke yourself in the eye ONE SIDE HAS TO BE CLOSED OUT FOR A PROFIT

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