Short two calls at the middle strike, and long one call each
at the lower and upper strike. The upper and lower strikes (wings) must
both be equidistant from the middle strike (body), and all the options must be
the same expiration.
Max
Loss
The maximum loss would occur should the underlying stock be
outside the wings at expiration.
Max
Gain
The maximum profit would occur should the underlying stock
be at the middle strike at expiration.
Profit/Loss
The potential profit and loss are both very limited. In
essence, a butterfly at expiration has a minimum value of zero and a maximum
value equal to the distance between either wing and the body. An investor
who buys a butterfly pays a premium somewhere between the minimum and maximum
value, and profits if the butterfly's value moves toward the maximum as
expiration approaches.....
