What is the butterfly strategy?
Call option is the right to buy a given asset for a fixed price for a specific date or before a specific date. PUT is the right to sell the asset for a fixed price for a specific date or before a specific date. The call increases when the price of the underlying asset rises; When the price of the underlying asset drops, it increases the value. Strategy of butterflies is a strategy of options using multiple banquets and/or calls to bet on future volatility without having to guess in which direction the market will move. For example, with bases of assets per 100, a long butterfly strategy can be built by purchasing tickets (or calls) on 95 and 105 and sales (short -circuit) twice as much put (or calls) per 100.
If the substrate of the not change price expires that it expires to 95 and 100 worthless and the travels to 105 will be worth 5 (from 105-100). If the backing amount is more than 10 after expiration5, all validity expires worthless and the initial cost of the butterfly is the amount of loss. If the background part is less than 95 after the expiry, the profit from the purchased to 105 will compensate for losses from short -circuited to 100 and the loss is again limited to the initial cost of starting the butterfly strategy. In essence, this is a limited risk access with limited profits to shorten the volatility of the underlying, because the maximum profit comes when the background has no volatility at all.
A short butterfly strategy is a conversation; Limited risk access with limited profit to long (betting to increase) basic volatility. By purchasing an internal strike and selling external strikes, this position has the greatest loss when the background does not move, and its greatest profitable exceeds one of the external prices of exercise. The short strategy of butterflies profits the same way from the great movement up, as well as from the large movement down.
A regular butterfly strategy uses all calls or all. Long iron moThe rear sells Put and the call at the internal strike and buys at the lowest strike and the call at the highest strike. Short iron butterfly with PUT and a call at the internal strike and is sold at the lowest strike and call at the highest strike. When it comes to profit and loss potential, iron butterflies look very much like a conventional butterfly built from all bows or all calls.
In general, it is the only time to choose one type of butterfly strategy before another, if there is a price disparity in hanging and calls that one of them makes cheaper to buy or more favorable for sale.