Butterfly

The butterfly spread is a distinct option that includes a mix of both a bull and bear spread while having three strike prices involved. This is an intriguing option to have. There are six particular butterfly spreads that you can invest in.

1. Long Call - The long call butterfly works with two short calls with a middle strike, a long call at one end and another long call at the opposite end. The general goal is for the stock to get to the midway point on the investment for you to make a profit. The losses are limited but they will be greatest if the stock gets to be too high or low.
2. Long Iron - The long iron butterfly uses a short call for the upper strike, long call and puts at the middle and another short put at the lower strike. This is the opposite of a long call in that the long iron needs the stock to go as high or low from the middle part of the chart as possible. You are looking for the stock to move in the opposite direction of where it might be heading. If a stock is going down in value, you will want it to keep going in that direction and vice versa. The long iron hedges the risk of when a stock might suddenly experience a spike in value or a sizable rally. You will still get a profit from the stock if it moves forward in that fashion.
3. Long Put - This third choice is also similar to a long call as you want the value to move in the midway point on the chart. The long put features two short puts around the middle strike and two long puts at the high and low ends. Again, you need everything to have the same expiration date.
4. Short Call - Two long calls are used around the middle strike on a short call butterfly and a short call is used on both the lower and upper strike totals. This allows you to buy the stock when it starts to have a big rise or decline in its value.
5. Short Iron - You will use a long call on the upper strike, a short call and short put at the middle, and a long put at the lower strike. The key is to keep the upper and lower strikes the same distance from the middle strike. This ensures the potential peak on the chart is equal in size. Again, you would still need the value of the stock to go as close to the middle strike price for you to realize the best profit.
6. Short Put - The short put option is where you buy two puts around the middle and sell two puts on the upper and lower strikes. Again, the upper and lower strikes must be of the same distance from the medium strike. You will make the most money when the price of the stock moves forward or backward. You can use this if there is a noticeable trend in the market showing a certain butterfly motion moving in some way.