Option trading strategies – Understanding the strangle and butterfly spread

NYSE floor

The strangle option position is a similar to the straddle position. It is also formed with a call and a put but with different strike prices and/or different expiration date.

Long Strangle: simultaneously a call and a put with different strike prices and/or different expiration date for a long strangle is purchased. The market expectation of the investor is therefore volatile, ie the investor expects large price changes in the underlying, stronger than a Long Straddle.

The profit potential is theoretically unlimited. The potential loss is limited to the paid option prices.

Short Strangle: This is the reverse of the long strangle position, ie the sale of a call and a put with different strike prices and/or different expiration date. The investor assumes an almost stagnant, slightly fluctuating levels of the underlying.

The profit potential is composed of the double option premium received . The potential loss is theoretically unlimited in strong rising or falling prices of the underlying.

In the same class price – spread positions is a portfolio of bought (long) and selling (short) options. It is therefore only calls or only puts. The options can consist of different series, ie they differ by strike price or maturity.

Depending on the ratio of options used is called x: y spreads. A credit position exists when, at a cash position of the building is a debit position when funds flow.

Butterfly spread

The butterfly spread is an options position that combines a bull spread and a bear price price spread. Basically, the butterfly spread with both calls and puts possible , are common but usually mostly call positions.

Long Butterfly Spread: In the long butterfly spread two calls are bought and sold two calls.

The first purchased call is purchased at a lower price of the underlying (in-the -money) and the second purchased call is bought at a higher price of the underlying (out-of-the-money).

Two additional calls are sold at the current price of the underlying (at-the-money).

Short Butterfly Spread: also two calls are bought and sold two calls In the short butterfly spread.

Here, however, the first call is in contrast to the above long position , sold at a lower price of the underlying (in-the-money), and a second call (out-of -the-money) are also sold at a higher price of the underlying. Furthermore, to buy two calls at the current price of the underlying (at-the-money).

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