Overview
Pattern evolution:
When to use: When the market is either below A or above C and the position is underpriced with a month or so left. Or when only a few weeks are left, market is near B, and you expect an imminent breakout move in either direction.
Profit characteristics: Maximum profit equals (B – A) less the net debit to create the position. Occurs when market, at expiration, is below A or above C.
Loss characteristics: Maximum loss occurs if market is at B at expiration. Amount of that loss is net debit to create the position. Break-evens are at B + and – initial debit.
Decay characteristics: Decay negligible until final month, during which distinctive pattern of butterfly forms. Maximum loss is at B. If you are away from (A-C) range entering last month, you may wish to hold the position.
CATEGORY: Precision
Long straddle B, short strangle at AC
Short put A, long put B, long call B, short call C
Additional Futures & Options Strategies
- Long Futures
- Long Synthetic Futures
- Short Synthetic Futures
- Long Risk Reversal
- Short Risk Reversal
- Long Call
- Short Call
- Long Put
- Short Put
- Bear Spread
- Bull Spread
- Long Butterfly
- Short Butterfly
- Short Iron Butterfly
- Long Straddle
- Short Straddle
- Long Strangle
- Short Strangle
- Ratio Call Spread
- Ratio Put Spread
- Ratio Call Backspread
- Ratio Put Backspread
- Box or Conversion
- Futures & Options Strategies Overview
Contents Courtesy of CME Group.