|This is a correction to one the articles in the
February 2012 newsletter sent out a few days ago
An observant subscriber noted that I incorrectly explained the construction of a butterfly spread. When I went back and re-read the explanation, I realized I got it wrong somewhere between my brain and the keyboard. I don't ordinarily send out corrections but I think this a critical enough mistake I need to correct it with an update. Thanks Herb for catching this!
Here is the correct definition of the butterfly construction
If I were to enter a butterfly call spread centered around $133, this would mean purchasing a $131 call and selling a $133 call creating a long vertical spread (entered for a debit). At the same time, I'm buying a long $135 call and selling a $133 call creating a short vertical spread (entered for a credit). The long spread will realize maximum gain when if it expires anywhere at or above $133. At the same time, the short vertical spread will realize maximum gain if it expires anywhere at or below $133.
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