to the airport to catch a flight when the inevitable happens. You’re stuck in traffic. Your
anxiety level elevates and your mind starts
racing. Do you take an alternate route, stick
with the slow traffic, or let it go and be content with missing your flight? As an options
trader, you know the value of time. When
your contracts’ expiration date gets closer
and your positions aren’t doing much, do you
let them expire worthless, or do you modify
your positions? Unlike a traffic snarl, with
the market you have more choices.
One strategy to consider is the unbalanced
butterfly. Perhaps you’re already familiar
with the butterfly and iron condor. And you
may have heard they can in fact be “
unbalanced.” But what makes them that way? How
does it change the strategy? And how do you
FIRST, THE FLY: REMEMBERED
To refresh, a butterfly combines a long
vertical spread and a short vertical spread assuming the following conditions:
• The options are the same type (all calls or
• Each of the vertical spreads must have the
same distance between strikes.
• The short option in the long spread and the
short option in the short spread must share
the same strike.
• All options must have the same expiration
Put this all together, and your profit curve
will look like Figure 1.
Because the two spreads in the butterfly
share the same short strike, it follows that
the spread you buy is always more expensive
than the spread you sell. Therefore, the trade
is always put up for a net debit.
Yet, there can be two problems inherent
to the butterfly. First, because it is a three-
legged trade, commissions can be much
greater than with other strategies, making
it potentially expensive. Second, it’s often
difficult to pinpoint a max profit because
it can only be reached at one price, which
is highly improbable. This is where an
unbalanced butterfly may help.
Rather than place a trade for a net debit, the
unbalanced butterfly allows you to modify
the original trade so you can place it for a net
credit. Then, if the trade doesn’t work out,
there’s a chance you’ll still get to keep that
credit for your troubles.
Unbalanced butterflies include an extra
short call or put vertical, even though you
may not see it. They’re sold at the strike furthest out-of-the-money (OTM) and the goal
is to sell enough premium in the second vertical to place the trade for a credit. Now you’ve
increased the potential profit, but you’ve also
increased the risk. And, you’ve added a vertical layer you need to monitor and manage.
Your new profit curve would look like the
trade in Figure 2.
WHAT’S THE CATCH?
Unlike the standard butterfly where your
maximum loss is limited to the debit you
paid, with an unbalanced butterfly, your risk
is limited, but possibly much greater than
that small debit. To illustrate, consider the
Suppose you’re looking at O TM butterfly
trades on stock XYZ, currently trading at
$115 per share. Maybe you’re bearish and
think there’s a good chance the stock can
settle around $95 per share at expiration. So
you decide to buy the 100-95-90 put butterfly
expiring in about two months.
Suppose you can place this trade for a seven-cent debit, excluding commissions. That
may not sound like much. But then again,
you’re asking for a price target $20 away from
the current stock price. While the planets
may align for you, and the stock could land
at $95 at expiration, the more likely outcome
is that the trading gods will keep your seven
cents and leave you with nothing.
What if you modify your trade from a net
debit to a net credit? Instead of trading the
100-95-90 put fly, you “skip” a strike, and
trade the 100-95-85? Turns out the trade
can in fact be placed for a net credit of two
cents, excluding commissions. This may not
seem like a big deal. But for a trade that has
a high probability of not realizing its maximum profit potential, getting your two cents’
worth may be a decent compromise.
Even if you put on
the unbalanced but-
terfly as one trade, it’s
helpful to look at it as
a butterfly plus a short
vertical. That way, you
can monitor the price of
that extra short vertical,
potentially buy it back
for a profit, and leave the
original trade was the
100-95-90 put butterfly.
That trade can be
broken down into one
long 100-95 put vertical and one short 95-90
put vertical. Put another way, you have one
long 100 put, two short 95 puts, and one
long 90 put.
Directional Fly Trap
Note that when you
use butterflies as
directional trades, you
typically want to trade
call butterflies when
you’re bullish and put
butterflies when you’re
bearish. While call
and put butterflies
having the same
strikes and expiration
are pretty much the
same trade, the bid-ask
spread can be far more
favorable in the out-of-
FIGURE 1: Classic Long Butterfly. Nothing fancy here
but a combination of a long vertical spread and short
vertical spread of the same type. Great for sideways
markets, but tough for traders to pinpoint a profit zone.
For illustrative purposes only.
FIGURE 2: See? It’s Tilted. Adding that extra
vertical layer shifted the risk curve of the long
butterfly. There’s potentially more risk along with
greater profit potential.
One long 100 put
Short two 95 puts
One long 90 put
One short 90 put
One long 85 put
One long 100 put
Short two 95 puts
One long 85 put
LONG BU TTERFLY
LONG UNBALANCED CALL BU T TERFLY