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 Max Loss

4 Butterfly Spreads Resistance Support ATM Bull Call Spread BCO SCO Bear Call Spread BCO SCO

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

6 Butterfly Spreads Resistance Support ATM

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