Long Butterfly | PFG Futures

Long Butterfly

Class: Precision

Synthetics: Long call A, Short 2 calls B, Long call C. Long put A, Short 2 puts B, Long put C Long put A, Short put B, Short call B, Long call CLong call A, Short call B, Short put B.Long put C

(Note: B – A must equal C – B)


When to use:

One of the few positions which may be entered

advantageously in a long-term option series. Enter when,

with one month or more to go, cost of the spread is 10%

or less of B – A (20% if a strike exists between A and B).

This is a rule of thumb; check theoretical values.

Profit Characteristics:

Maximum profit occurs if market is at B at expiration. That

profit would be B – A – cost of doing spread. This profit develops,

almost totally, in last month.

Loss Characteristics:

Maximum loss, in either direction, is cost of spread. A very

conservative trade, break-evens are at A plus cost of spread

and at C less cost of spread.

Decay Characteristics:

Decay negligible until final month, during which distinctive

pattern of butterfly forms. Maximum profit growth is at B.

If you are away from A – C range entering last month, you

may want to liquidate position.

See also  Lean Hogs Seasonal Chart