9 The Butterfly and Condor
Spread strategies described in the last chapter create strategies with limited profit potential, in exchange for maximum and limited losses. Expanding on this, more advanced hedges can be created in various ways. One of the most popular of these is the butterfly.
A butterfly is a spread with three strikes, made up of calls, puts, or both. The high and low strike are both long and the middle strike is short; or high and low are short and the middle strike is long. Normal construction calls for two middle strikes versus one each of a higher and lower strike.
The four varieties of the butterfly follow, with examples based on closing values as of November 6, 2015, for Microsoft (MSFT), which closed at $54.92. December options ...
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