Butterfly Strategies
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A variety of individual butterfly strategies are in the option income traders ‘toolbox’ for use - including the ‘regular’ butterfly consisting of either calls or puts, the iron butterfly position, and the broken wing butterfly - or ’skewed’ butterfly.
The ‘regular’ or traditional butterfly is made up of either all calls or put options. These are usually constructed with the short strikes being sold at or near where the stock or underlying investment vehicle is currently trading at. The wings of this version of the butterfly spread are bought out an equidistant length away from where the shorts were sold.
An Iron Butterfly could actually be viewed as an iron condor - it is made up just like an iron condor trade - the difference being that the shorts are sold at the same strike price as each other - as if attached together. One could think of this trade as an iron condor just ‘pushed’ together in the middle.
The broken wing butterfly can be made up of puts, calls - or both calls and puts. What makes this trade different is that both wings are not spaced apart equally on either side. One wing is shorter than the opposite side - making this trade ’skewed’.
Usually traders consider the butterfly spread trade to be a non directional trade - however these trades can also be constructed to be played directionally.
photo credit: Diganta Talukdar
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