Butterflies, condors and “wingspreads” in options are nothing like what the actu word looks like but the only way it is related to the word is that their expiration date risk profiles look like something that could fly. That, and anything that can add a bit of color to the otherwise dreary world of option trading is welcome. When talking about butterflies et al., you’ll hear self-proclaimed experts speak of options as “body” and “wings”. The “body” refers to options with strikes in between the two exoskeletal outermost strikes. The “wings” refer to options at the diaphanous outermost strikes. We use the term “wingspreads” to identify option positions such as “condors”, “pterodactyls” and “albatrosses”, which look like butterflies that have been stretched out. Rather than come up with a myriad of names to identify these spreads, we use “wingspreads” because they all have similar risk/reward characteristics and sensitivities, and those flying creatures are much more threatening than butterflies.

The risks and potential rewards of butterflies and wingspreads are limited. If you buy a butterfly, the most you can lose is the amount you paid for it. The most you can make is the difference between the “body” strike and a “wing” strike minus the amount you paid for it. If you sell a butterfly, the loss and profit are the inverse of buying a butterfly.

Wingspreads’ sensitivity to movement in the stock price is related to the time to expiration. For example, the closer a butterfly is to expiration, the more sensitive its price is to a change in the price of the stock. What this means is that butterflies and wingspreads that are far from expiration don’t always change in value that much when the stock moves. This means that all wingspreads aren’t necessarily the best tool for exploiting changes in the stock price. Wingspreads can be bullish and bearish – but the closer a wingspread is to expiration, the more bullish or bearish it can be.

Wingspreads reach their maximum value when the stock price is at (in the case of butterflies) or between (for other wingspreads) the middle or “body” strike(s) at expiration. They are at their minimum value when the stock price is either above the higher “wing” strike or below the lower “wing” strike at expiration. Therefore, wingspreads can be effective when you believe that a stock’s price will land within a specified range and within a specified time frame. When you believe that a stock will stay at a single price, long butterflies might be a good choice. When you think a stock will stay in between two prices, long wingspreads with middle “body” strikes at the low and high prices of the stock’s range might work best. In this sense, long butterflies and wingspreads are like short straddles and strangles, but without the unlimited risk. Look at a graph of the value of a long butterfly at expiration, and the middle of the butterfly looks like a short straddle.

Conversely, if you think the price of a stock is going to move a way from a specific point or outside a specific range of prices, short butterflies and wingspreads might be a good choice. They work a bit like long straddles and strangles, but without the unlimited profit potential. They are also generally less expensive. Look at a graph of the value of a short butterfly at expiration, and the middle of the butterfly looks like a long straddle.


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