11. Long Butterfly

Scenario:

The trader currently has a #17 Ratio Call Spread. He thinks this is still a good position. However, he is worried that the futures may increase dramatically on the upside, leaving him with a substantial loss. He adds a long call and converts the position into a long butterfly.

Specifics:
Underlying Futures Contract:	December Lean Hogs
Futures Price Level:	52.50
Days to Futures Expiration:	74
Days to Options Expiration:	45
Option Implied Volatility:	21.5%
Option Position:	Long 1 Dec 52.00 Call	- 1.825 ($547.50)
	Short 2 Dec 54.00 Calls	+ 0.950 ($285.00)
	Long 1 Dec 56.00 Call	- 0.450 ($135.00)
		- 0.375 ($112.50)

At Expiration:
Breakeven:	Downside: 52.375 (52.00 strike + 0.375 debit). Upside: 55.625 (56.00 strike - 0.375 debit).
Loss Risk:	Losses start above 55.625, or below 52.375, but limited to the debit paid. Maximum loss above 56.00 strike or below 52.00 strike.
Potential Gain:	Gains peak at strike of written calls. Maximum profit of 1.625 ($487.50).

Things to Watch:

There is not much risk in this position. Volatility has little effect. Avoid follow-up strategies unless you are quite certain of a particular move. Nearly every follow-up to this strategy requires more than one trade—possibly incurring large transaction costs.

Follow-up Trading Strategies