Trading the Butterfly SpreadThe butterfly spread is very popular among professional traders. It involves 4 option contracts and can be a little confusing. When you place this trade you should have a neutral stance on the stock or ETF meaning that you do not expect it to make a big move in either direction. It involves buying an out of the money call option and in the money call option, and selling two at the money call options. The in the money option and the out of the money option should both be the same distance away from the at the money option. If the stock stays between the two strike prices you bought you could potentially make money. If it either goes below the in the money option or above the out of the money option this trade would be considered a loss. Example of a butterfly spread Ice was trading at $72 and has been bouncing between $50 and $92.5; we expect it to stay in between those prices. We buy 1 $50 call for $23.4 and buy 1 $90 call for $2.30. This costs us $25.7; in addition we sell 2 $70 calls on the stock and make a total of $16.60. This gives us a net debit of $25.7-$16.6 or $9.1. 
So the $9.1 is how much it will initially cost us to enter the trade. Once we are in we would wait until expiration where 1 of
4 things could happen.
1. Above $90 If the stock closes above $90 the two options we sold at the $70 strike price would be exercised forcing us to buy it at $70. However we also have the right to buy it at $50 and at $90 because of the two options we bought. So we would buy the stock at $50 sell it at $70 making $20 and buy the stock at $90 and sell it at $70 losing $20. We would break even here, but the trade would be a loss because we spent $9.1 to enter it in the first place. 2. Above $70 but below $90 If the stock closed below $90 but above $70 we would be forced to buy 200 shares of the stock at $70 but would be able to buy 100 shares at $50. So on 100 shares you would make $20. On the other 100 shares you would take a loss based on what the price of the stock was. So if the stock was trading at $72 by expiration you would be forced to buy it at $72 and sell it at $70 losing $2 on the other 100 shares. 3. Above $50 but below $70 If this happened everything would expire worthless except for the $50 call option. You would be able to buy the stock at $50 and sell it at whatever price it is at. For example if the stock was at $60 by expiration we would be able to buy it at $50 and sell it at $60. 4. Below $50 In this case everything would expire worthless. You would only lose the $9.1 you initially put into it. More on the butterfly spread The Butterfly spread can also be created with nothing but Put options. In this case everything remains the same only reversed.
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