1. Butterflies/Flies

2. A butterfly, also know as a fly, is a hedged position, which is executed to reduce the risk of adverse price movements. It consists of a trader having an opposing position in consecutive spreads. e.g long/short or short/long The advantage of such a strategy is that an element of protection is afforded to a position within a moving market where the losses of one half of the position are counteracted by the profits from the other half. Such a strategy is ideal for either holding positions overnight or for entering a volatile period e.g. over an economic figure. However, it is NOT a guarantee that you will make money !!

3. A fly example This example shows how a trader can enter into a one lot short fly at a value of -1. This has been done solely by using two 3 month spreads. Selling Mar14/Jun14 at a value of 0 and buying Jun14/Sep14 at a value of +1. The value of the fly is calculated by subtracting the second spread (chronologically/timeline) from the first spread (e.g. 0 - +1) Contract3M Spread 3M Spread Fly Value01 Mar14(1) Jun14112 Sep14(1)

4. This example shows how a trader can enter into a one lot short fly at a value of -1. This has been done by buying one 6 month spread and selling double the amount of a 3 month spread Buying Sep14/Mar15 at a value of +5 and selling Dec14/Mar15 at a value of +3. Contract6M Spread 3M Spread Fly Value5 (2 & 3) 3 Sep1411 Dec14(2) Mar15(1)21

5. Here is another example: In this instance the trader sold Sep14/Dec14. In order to convert the initial position into a fly the trader then bought half the amount of the original trade in the 6 month spread, Sep14/Mar15, at a value of 5.5. Contract3M Spread 6M Spread Fly Value2.55.5 (2.5+3)-0.5 Sep14(10)5(5) Dec1410 Mar15(5)

6. Flies Assessment: Calculate the value of the following flies and state whether the position is long or short, using the information given. All trades are for 1 lot, unless specified: 1Sell Sep14/Dec14 @ 2.5 and buy Dec14/Mar15 @ 3.5 2Sell 1 lot of Mar14/Sep14 @ 1 and buy 2 lots of Jun14/Sep14 @1 3Buy 1 lot of Mar16Sep16 @ 27 and sell 2 lots Jun16/Sep16 @ 14.5

7. 4 Buy 10 lots of Jun14/Dec14 @ 2.5 and sell 20 lots Jun14/Sep14 @ 0.5 5 Sell 2 lots of Mar15/Mar16 @ 32.5 and buy 2 lots of Sep15/Mar16 @ 20.5 and buy 4 lots of Jun15/Sep15 @ 7 6Buy Mar14/Dec14 @ 2.5, sell Jun14/Dec14 @ 3 and sell Jun14/Sep14 @ 1 7Which trades, using only 3 month spreads and current prices, would a trader have to execute to obtain a position of long the Sep15 fly at a value of -2.5