Does anyone get how the butterfly spread breakeven is calculated?
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The debit is cost of the two longs minus the double credit from the short.
Now you add that to the lower long and subtract that from the upper long to find the two breakeven.
understand the payout shape which is an upside down V.
The ‘‘add’’ and ‘‘subtract’’ work like that only if the net premium outlay is positive. The reverse is true if the net premium is negative.
yes im referring to a long butterfly seeking lower volatility . The short butterfly is seeking higher volatility and getting a credit.
You can have a long butterfly spread (seeking lower volatility) with a negative net premium outlay as well.
This stuff can be done orally as well. See the pay off on all iption positions, net out the premiums and accordingly add the net figure to lowwr strike and negate the se from higher strike.
Well yes you can build these things with credit spreads or debit spreads. The text i dont belive has mention of credit bull and credit bear spreads but if they throw that into the test would be fun, lots would miss the question.
Reading 33, EOC #3 is a long butterfly spread with calls that has a negative prem outlay.
This is my example already. Its a $1 debit using debit spreads, not credit spread.
Like i said, you add the debit to the lower long and subtract from the upper long.
110 + 1 = 111 and 120-1 = 119
The text diesnt use credit spreads.
”negative premium outlay” refers to a credit, not a debit. Outlay refers to a cost.
Not sure with what all means with the debits and credits but if you ‘‘Now you add that to the lower long and subtract that from the upper long to find the two breakeven.’’ like you said in your first post, the lower breakeven point will be 110+(-1) =109 and the higher breakeven point will be 120-(-1)=121, which are both incorrect as the breakeven points are 111 and 119.
If u don’t like the question you do not have to answer.
The debit is 1, not negative 1. The cost is 1, not negative 1. The loss is 1, not -1. In accounting, if you mix up these signs, would be very very bad 
Loss is the same as a debit is the same as a cost.
Its called a premium outlay, not a negative premium outlay. You write that on the exam and its no points becuase you’re inferring the opposite. A negative cost is a profit, not a loss!
I even defined the debit, and if you do the math, its 1, not negative 1.
Like I said, add the debit to the lower long 110 + 1 = 111, and subtract the debit from the higher long 120 - 1 = 119.
There are two breakeven prices:
- Xlow + Loss at Xlow = Xmiddle − Profit at Xmiddle
- Xmiddle + Profit at Xmiddle = Xhigh − Loss at Xhigh
my method is by taking the max payoff if the stock were to finish at exactly the strike of the two shorts and adding/subtracting from there. Either way works though. Assuming you’re the long side of the spread using calls.
Not so algebraically.
If you subtract a negative cost, you’re adding a positive number.