What is a butterfly option strategy and the advantages of buying a butterfly option combination

  The butterfly option combination is a common trading strategy

  It usually consists of three options with the same underlying, the same expiration time, the same strike price interval, and different quantities.

  1 low strike price, 2 intermediate strike prices, and 1 high strike price

  

  Buying a Butterfly Combination Also Known as Long Butterfly Combination

  That is, buy 1 option with a low strike price, sell 2 options with an intermediate strike price, and buy 1 option with a high strike price

  Buying a Butterfly Combination

  Mostly used when the market is expected to be relatively stable when the option expires

  The payoff to maturity using call and put options is similar

  Let's take a call option as an example

  Mr. Wang expects the CSI 300 Index to remain near 3750

  Bought 1 call option with strike price of 3700

  Sell ​​2 call options with strike price of 3750

  and buy 1 call option with strike price of 3800 at a cost of 2.7 pips

  

  The current portfolio Delta is close to 0

  Combining the expiry profit and loss of the three call options

  constitutes the expiry profit and loss of the long call butterfly portfolio

  

  We can see that the high and low strike prices are like the wings of a butterfly.

  The middle strike price is like the body of a butterfly

  When the index points remain within a certain fluctuation range

  Buy Butterfly to Profit

  And the maturity yield reaches the maximum point at the middle strike price

  47.3 points profit here

  When the index point fell from 3750 to 3700

  The overall return of the portfolio continues to decline

  and reached breakeven at 3702.7

  At this point, the call options with strike prices of 3750 and 3800 would be worthless

  Only call options with a strike price of 3700 points are in-the-money options

  The return to maturity of the portfolio is the index point minus the low strike price minus the initial premium payment

  When the index point falls below 3700 points, all options are out-of-the-money or at-the-money options with an expiration value of 0

  Adding in the premium payment at the beginning of the period, the portfolio will lose 2.7 points

  Similarly, when the index point rises from 3750 to 3800

  The overall return of the portfolio continues to decline

  and reached breakeven at 3797.3 points

  At this point, a call option with a strike price of 3800 would be worthless

  The call option bought with a strike price of 3700 and the call option sold with a strike price of 3750 are both in-the-money options

  The maturity yield of the portfolio is the high strike price minus the index point minus the initial premium payment

  When the index breaks above 3800 points, the gains from buying options just offset the losses from selling options

  Adding in the premium payment at the beginning of the period, the portfolio still loses 2.7 points

  This is also the maximum possible loss for buying a butterfly portfolio

  someone might ask

  If the expected volatility of the underlying

  Why not just sell a straddle with a strike price of 3750?

  Let's compare the P&L graphs for the two portfolios

  

  It can be found that although the breakeven point of selling a straddle is wider than that of buying a butterfly

  But if the target is really volatile

  Investors' losses are limitless

  Buying a combination of butterfly options can help investors lock in the two-wing risk

  The risk is reduced, and the profit is also reduced to a certain extent

  Finally, let's summarize the formula for calculating the maximum profit and loss and breakeven point at the expiration of the butterfly option portfolio.

  The maximum benefit of buying a butterfly spread is equal to the high strike price minus the middle strike price minus the opening premium payment

  The maximum loss is equal to the initial premium payment

  Low breakeven point equals low strike price plus opening premium payment

  A high breakeven point equals the high strike price minus the opening premium payment

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