For Option Traders: Butterfly spread

One good strategy to use is Butterflyspread. One profits when the underlying moves towards the short strike or remains in a reasonable trading range until expiration. A traditional butterfly is a simple, three-legged option spread. It is the simultaneous sale of two at-the money near month calls or puts and the purchase of one call or put at the next higher and lower strikes, in the same expiration, in the same underlying. The skewed butterfly is also a three legged spread but the strikes are widened in order to embed a short vertical spread inside of the butterfly. This is done in order to reduce the cost and create a net credit. This trade has more risk but a higher probability of success and greater potential maximum profits.

Example 1: (Balanced Butterfly)

XYZ index is trading at $100 and it's mid Dec.
We will sell two Jan 100 calls and buy 1 Jan 95 call and 1 Jan 105 call for $.90 debit.
The maximum risk is $.90, and the maximum potential profit is $4.10.
The max give up (slippage) over fair value should be .20 for self-directed clients, .10 cents for TOS auto-trade clients.

Example 2: (Unbalanced Butterfly)
XYZ index is trading at $100 and it's mid Dec.
We will sell two Jan 103 calls and buy 1 Jan 102 call and 1 Jan 105 call for .40 credit.
The maximum risk $1.60, and the maximum potential profit is $2.00. We hope to buy back the 103/105 vertical back for a small debit (i.e. a .20 debit) prior to closing the entire position to alleviate margin risk.
The max give up (slippage) over fair value should be .20 for self-directed clients, .10 cents for TOS auto-trade clients.