NationMaster - Encyclopedia: Butterfly (options)

In options trading, a butterfly is a combination trade resulting in the following net position: In finance, an option is a contract whereby the contract buyer has a right to exercise a feature of the contract (the option) at future date (the exercise date), and the writer (seller) has the obligation to honour the specified feature of the contract. ... In finance, a postion may be: A commitment to buy or sell a given amount of securities or commodities; The amount of securities or commodities held by a person, firm, or institution; or The ownership status of a persons or institutions investments. ...

all with the same expiration date. At expiration the position will be worth zero if the underlying is below X-a or above X+a, and will be worth a positive amount between these two values. The payoff function is shaped like an upside-down V, and the maximum payoff occurs at X. In finance, a long position in a security, such as a stock or a bond, or equivalently to be long a security, means the holder of the position owns the security. ... It has been suggested that this article or section be merged with Short selling. ... For an option contract, expiration is the date on which the contract expires. ...

Since the payoff is sometimes zero, sometimes positive, the price of a butterfly is always non-negative (to avoid an arbitrage opportunity).

and this is equivalent to the call version (as can be verified via Put-call_parity). In financial mathematics, put-call parity defines a relationship between the price of a European call option and a European put option - both with the identical strike price and expiry. ...

The double position in the middle is called the body, while the two other positions are called the wings.

Category: Derivatives A derivative is a generic term for specific types of investments from which payoffs over time are derived from the performance of assets (such as commodities, shares or bonds), interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI) or an index of weather... In finance, an option is a contract whereby one party (the holder or buyer) has the right but not the obligation to exercise a feature of the contract (the option) on or before a future date (the exercise date or expiry). ... In finance, a vanilla option is a type of derivative security. ... In finance, the style or family of an option is a general term denoting the class into which the option falls, usually defined by the dates on which the option may be exercised. ... A call option is a financial contract between two parties, the buyer and the seller of this type of option. ... A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the seller of the option. ... For other uses of the term Warrant, see Warrant (disambiguation) A warrant is a security that entitles the holder to buy or sell a certain additional quantity of an underlying security. ... A bond option is similar to a stock option with the difference that the underlying asset is a bond. ... Employee stock options are call options on the companys own stock. ... In finance, a foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. ... The introduction to this article provides insufficient context for those unfamiliar with the subject matter. ... Payoffs and profits from buying stock and writing a call. ... A naked put is a put option where the option writer does not have a short position in the stock. ... The bear call spread is a limited profit, limited risk options trading strategy that can be used when the options trader is moderately bearish on the underlying security. ... The bear put spread is a limited profit, limited risk options trading strategy that can be used when the options trader is moderately bearish on the underlying security. ... The introduction to this article provides insufficient context for those unfamiliar with the subject matter. ... The bull put spread is a limited profit, limited risk options strategy that can be used when the options trader is moderately bullish on the underlying security. ... In finance, a straddle is an investment strategy involving the purchase or sale of particular derivatives. ... To straddle is to sit, stand or walk with the legs spread wide. ... Volatility arbitrage, a. ... Credit spread is the difference in yield between different securities due to different credit quality. ... A synthetic underlying position synthetically duplicates the payoff of a long underlying position with a long call and short put at the same strike and expiration. ... In finance, an exotic option is a derivative which has features making it more complex than commonly traded products (vanilla options). ... The style or family of a financial option is a general term denoting the class into which the option falls, usually defined by the manner in which the option may be exercised. ... The style or family of a financial option is a general term denoting the class into which the option falls, usually defined by the manner in which the option may be exercised. ... A barrier option is a type of financial option where the option to exercise depends on the underlying crossing or reaching a given barrier level. ... A binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... Option contracts are complex to value. ... In finance, moneyness is a measure of the degree to which a derivative security is likely to have positive monetary value at its expiration. ... Option Value In finance, the value of an option consists of two components, its intrinsic value and its time value. ... The Black-Scholes model, often simply called Black-Scholes, is a model of the varying price over time of financial instruments, and in particular stocks. ... The Black model (sometimes known as the Black-76 model) is a variant the Black-Scholes option pricing model. ... In finance, the binomial options pricing model provides a generalisable numerical method for the valuation of options. ... In financial mathematics, the implied volatility of a financial instrument is the volatility implied by the market price of a derivative based on a theoretical pricing model. ... In finance a swap is a derivative, where two counterparties exchange one stream of cash flows against another stream. ... In the field of derivatives, a popular form of swap is the interest rate swap, in which one party exchanges a stream of interest for another partys stream. ... Total return swap, or total rate of return swap, or TRORS, a contract in which one party receives interest payments on a reference asset plus any capital gains and losses over the payment period, while the other receives a specified fixed or floating cash flow unrelated to the credit worthiness... An equity swap, a branch of derivative security, is a swap in which at least one party pays the return on a stock or stock index. ... The credit default swap (CDS) is a swap designed to transfer the credit exposure of fixed income products between parties. ... A Forex swap is an over the counter short term interest rate derivative instrument. ... A currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped. ... Constant Maturity Swaps are used in the financial markets to have a reference yield curve. ... A basis swap is an interest rate swap which involving exchange of two floating rate financial instruments denominated in the same currency. ... A variance swap is a financial derivative whose payoff is the realised volatility squared of the underlier based on a prespecified set of sampling points. ...