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Butterfly spreads

In an effort to be complete, because you will hear this term if you trade long enough, I will tell you what a butterfly spread is, but with a word of advice. A butterfly spread is a combination of both a bull spread and a bear spread. It involves three strike prices, for example, buying a May 290 corn call, selling two May 300 corn calls, and buying a May 310 corn call. These are limited risk, but the profit potential generally does not justify the costs involved. Remember, you have the commission costs (in this most simple case, there are four of them), and then you have to overcome the bid to offer spreads on three positions for both the in and the out. Your broker might like the butterfly, but I suggest you fly away from it.


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