# Advanced Options Strategies (Level 3)

May 22, 2022

### Can I see an example ?

To figure out how a lot person could potentially gain or lose from an iron butterfly strategy, let ’ s front at an exercise from the fictional MOYE company, whose shares are presently trading at \$ 100. think that a trader wants to use a short iron chat up. The trader sells a short call and a short put with hit prices of \$ 100 ( receiving premiums of \$ 3 per contribution and \$ 4 per share, respectively ) and simultaneously buys a long call with a strike price of \$ 110 ( paying a \$ 1 premium per plowshare ) and a farseeing arrange with a strike price at \$ 90 ( besides paying a \$ 1 agio per share ). Remember, they all have the lapp termination date. therefore, the trader receives a net credit of \$ 5 per parcel ( \$ 3 + \$ 4 – \$ 1 – \$ 1 = \$ 5 ) when opening this position .

### Maximum Potential Gain

Your maximum electric potential gain should occur when the lineage price closes at the short-change put and short margin call strike price on the termination date. In our example, you should realize your maximum potential gain if the stock price closes at the \$ 100 strike monetary value on the exhalation date. In this case, all four options should expire despicable and you would keep the integral net credit of \$ 500, assuming each contract represents 100 shares.

### maximum Potential Loss

Your maximum likely loss should occur when the stock price closes below the long invest hit price or above the long name strike monetary value, assuming the widths of each dispersed are the same. If they are different, the utmost likely loss could be greater, corresponding to the width of the wide spread. In our exemplar, you should realize your maximum potential loss if, when the options expire, MOYE shares conclusion either below the lower put mint ( \$ 90 ) or above the upper call strike ( \$ 110 ). In detail: To calculate the utmost potential loss on the passing date, consider two scenarios.

If the stock price closes below \$ 90, calculate the deviation between the hit prices of the place options ( \$ 100 – \$ 90 = \$10 ). then, subtract the net credit rating per share you received upfront ( \$ 10 – \$ 5 = \$5 ). This equates to a loss of \$ 5 per share, or \$ 500 in sum. Since both of the call options are out of the money at the airless, they should expire despicable. If the stock price closes above \$ 110, calculate the remainder between the strickle prices of the cry options ( \$ 110 – \$ 100 = \$10 ). then subtract the internet accredit per share you received upfront ( \$ 10 – \$ 5 = \$5 ). This equals a loss of \$ 5 per parcel, or \$ 500 in sum. Since both of the place options are out of the money, they should expire worthless.

Keep in mind, this is a theoretical model. actual gains and losses will depend on factors such as the prices and number of contracts involved .

### What are the breakeven points at passing ?

Because an iron butterfly consists of two spreads, the deal scheme has two breakeven points, one on each of the wings. If the store price drops, then the breakeven point is the hit of the short frame ( higher put hit ) minus the web credit per share. If the broth price rises, then the breakeven luff is the strike of the short predict ( lower call strike ) plus the net recognition per plowshare. In the MOYE model above, if the standard price drops, the breakeven point is \$ 100 – \$ 5 = \$ 95. If the stock price rises, the breakeven detail is \$ 100 + \$ 5 = \$ 105. so, if MOYE closes at either \$ 95 or \$ 105 on the termination date, this iron chat up should neither make nor lose money. Between the stove of \$ 95 to \$ 105, this strategy should generate a profit .

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