Long Butterfly Spread Basics

This chapter introduces the basics of long butterfly spreads. It illustrates how these spreads are structured and how to exit from these spread positions. Long butterfly spread can be constructed using calls, puts, or combinations of both calls and puts. For those butterfly spreads that have identical risk/reward profiles, an investor considering initiating a long butterfly position can choose between buying a call butterfly and buying a put butterfly. Exiting from an existing long call butterfly or long put butterfly position by selling the opposing put or call butterfly may be a bit more problematic for the individual investor. Even though call and put butterflies with the same strikes and same expiration may have identical risk/reward profiles, selling a put butterfly to close an existing long call butterfly position, or selling a call butterfly to close an existing long put butterfly position, leaves a residual position that, though neutral, must be held until expiration.