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Butterfly Spreads – How to Trade a Call Butterfly Spread



This article originally appeared on The Options Insider Web site. 

In the second part of my series on butterfly spreads (if you missed Part I, you can check it out here), I will visually show how to place a call butterfly spread using the TradeStation platform. The actual trade is meant to be an example, NOT a recommendation.

Below is a daily chart of the underlying on which a butterfly call spread will be placed. Observe that the underlying has closed at $42.55 and that I am anticipating it to stay range-bound between the $41 and $45 level. For educational purposes only, let us go along with the assumption that the underlying most likely will be somewhere close to the $43 level by the February 2010 expiry.

Option Spreads - Butterfly

See full-size chart.

The next figure shows the step of switching from one option strategy to another. The default setting on TradeStation is “Buy” on the first button and “Covered Call” on the second. In order to place our butterfly, the selection needs to be changed from “Covered Call” to “Btfy Call.” The very first button does not need to be changed from buy to sell because, in fact, we are buying our butterfly spread for a debit. This is the very first click we ought to do prior to proceeding to the next click.

Butterfly Spreads

See full-size chart.



The next step involves going to the View Tab and requesting the display of an additional component of the Option Analysis window. Observe in the figure below that by default only Asset Pane and Options Pane are checked off. In order for us to be able to trade spreads, we need to also check the Spread Pane, as shown below.

Butterfly Spread

See full-size chart.

The next figure shows three things going from the top to the bottom.

Butterfly Call Spread

See full-size chart.

The Asset Pane reads from left to right with the following data: First item being the ticker, which is whited out since this example is for educational purposes only. The second is the last price of the underlying, the net change in points, the high colored in light green signifies the highest the underlying has traded the day I had placed this trade. The next one is the change in percentage, which on that day was only 0.31%, followed by the low of the day colored in light red. The additional info on the Asset Pane relates to the volatility.

The second component of the TradeStation Option Analysis Window is the actual Option Pane. It displays the following data, which are completely customizable: Symbol of individual options, Volume, Open Interest, High, Gamma, Low, Bid, Delta in light blue, Ask and Strike price. All this information pertains to the calls, and then it repeats on the right side for the puts. However, in this example, I am addressing a call butterfly, so I will solely focus on the call side of the option chain.

Additional info on the Option Pane that needs to be addressed is the dark blue line with a small square box containing a plus sign in it. When we click on the plus, it becomes a minus sign displaying the various strike prices. I have selected only five strike prices, those between 40 and 45, and have blocked all others.

The third part of the TradeStation Option Analysis Window is the Spread Pane, which is currently displaying only two months of data: January options (which were expiring two days after I originally wrote this) and February. There were other months available, yet I have selected less info.

Finally, I can address our butterfly call spread, which involves the 41/43/45 strike prices.

As I mentioned in my previous article on this topic, the wings are bought (41 and 45 calls) while the body or gut (43 call) is sold. Observe that the platform ensures that there is not a mistake as to which strike prices are involved. However, be aware that this butterfly spread has a two-point wing span. This info could be verified by looking at the button next to the two that I have already addressed “Buy” and “Btfy Call.” The third one reads “2:2 Strikes.” Initially, the default was “1:1 Strikes.”

Also observe that in the Spread Pane of the TradeStation Option Analysis Window is the brown line reading 41/43/45. This line matches the strike prices that are involved in the spread with the Greeks. Self-evidently, the light blue box displays the aggregate of our butterfly call spread. The fact that the delta of $9.17 is positive means that the position has a slightly bullish bias.

The cost of placing the trade with 10 contracts per leg is only $570, while the maintenance is $1,430.

Stay tuned for the final article of my series on butterfly spreads.  

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