← Strategy LabLesson 35 · 4:53
Short butterfly
Summary
The short butterfly flips every piece of the long call butterfly, so you are paid to bet XYZ will not end at $100. In the example you collect $113 and keep it if XYZ ends below $95 or above $105, but if XYZ ends right at $100 you lose $387. You break even at $96.13 and $103.87.
Key terms
- short butterfly
- Selling one call below the price, buying two at the price and selling one above it, to be paid up front for a bet the stock will not end at the middle strike.
- net credit
- When a pair of trades brings cash in overall.
- V shape
- exercise
- Using the right in an option, so a call buys, or a put sells, the shares at the strike price.
- short shares
- Owing shares you do not own, which can happen when a call you sold is exercised against you and your own calls expire.
Check yourself
Answer each question to see why the right answer is right.
1. How much cash comes in, net, when you open the lesson's short butterfly?
2. Why is the worst case a loss of $387 at $100?
3. XYZ ends at $110 on the last day. What is your result?
4. XYZ sits at $105 and the days pass with nothing else changing. What does time do to your result?
5. XYZ ends at $98 on the last day. What can happen to you?
Finished the video and the quiz? .