Double butterfly spread




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Double butterfly spreadDouble Butterfly Spread

Double Butterfly Spread - Introduction

The Double Butterfly Spread is an advanced butterfly spread that uses a combination of two butterfly spreads in order to create peak profit across two different strike prices. A normal butterfly spread is capable of peak profit only when the price of the underlying asset closes exactly on the middle strike price. However, if the price of the underlying asset is expected to close at either one of two prices, you can put two seperate butterfly spreads targetting each price together to create a Double Butterfly Spread in order to maximise profit no matter which price it hits with very little capital commitment.

Double Butterfly Spread - Classification

When To Use Double Butterfly Spread?

One could use a Double Butterfly Spread when one expects the price of the underlying stock to close exactly at either one of two different strike prices by expiration.

How To Use Double Butterfly Spread?

A Double Butterfly Spread is simply putting on two seperate butterfly spreads with middle strike prices on two different strike prices. This creates a position with two peak profits on two strike prices. While a butterfly spread is used for targetting a single strike price, Double Butterfly Spreads target two different strike prices to increase the chances of peak profitability and are useful when the price of the underlying asset is expected to hit one of two prices due to factors such as a potential take-over.

Double Butterfly Spreads are usually used when the targetted prices are more than one strike apart. If the targetted prices are two consecutive strike prices, a Condor Spread could be used instead with almost the same profitability and incurring a lot lesser commissions due to fewer trades making up the position. However, if the targetted prices are more than one strike apart, using a condor spread would yield a lot lesser maximum profit due to the fact that it is also maintaining peak profit potential in between the two targetted strike prices.

As such, the Double Butterfly Spread is a huge six legged options position with three legs forming each butterfly spread. It can also be constructed using only call options (known as a Call Double Butterfly Spread) or put options (known as a Put Double Butterfly Spread) or even a combination of both with one Call Butterfly Spread pairing up with a Put Butterfly Spread. The outcome and capital outlay of all three configurations should not be very different when put call parity is not severely broken.