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A Short Butterfly Spread or reverse butterfly is the inverse of the more conventional Long butterfly. Short Butterflies are non-directional strategies that can be created from either puts or calls.

Short Butterfly Spreads are also constructed from a debit and Credit Spread, but the wings use Short rather than Long Options. The model is as follows:

1 x Short Out Of The Money Option
2 x Long At The Money Option
1 x Short In The Money Option

As with Long butterfly Spreads, the wings are equidistant from the two Options which make up the body (although the are Long rather than Short positions).

Short Butterfly Spreads are a limited profit and risk defined strategy. Maximum loss from a Short butterfly position occurs if the price of the Underlying is at the same price as the two Long Strike Price contracts. Maximum profit is possible if the price is outside of either of the two Short wings.

Theta (time decay) is negative for Short butterflies because the opportunity for them to become profitable is reduced.

Short butterfly strategies benefit from Volatility, but unlike alternatives such as a Long Straddle or Strangle, the benefit is less pronounced. The Short Iron Condor is similar in terms of risk and potential profit characteristics.

Short Butterfly
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Contributed by: Ralph Windsor

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Short Butterfly - Call Options and Put Options Strategies - Derivatives - Break Even Point

Video from FinIdeas explaining the behaviour and characteristics of Short Butterflies.


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Short Call Butterfly
http://www.optionseducation.org/strategies_advanced_concepts/strategies/short_call_butterfly.html

OIC Article on short butterfly strategies.

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View OIC Options Glossary in Options Market Glossary Directory


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Video

Short Butterfly - Call Options and Put Options Strategies - Derivatives - Break Even Point

Video from FinIdeas explaining the behaviour and characteristics of Short Butterflies.