Wingspread

DEFINITION of 'Wingspread'

To maximize potential returns for certain levels of risk (while necessarily exposing oneself to potential losses for other levels of risk), some investors will attempt to profit by selling options at a certain strike price(s), while simultaneously buying options at strike prices both above and below the middle strike price(s). The highest possible return occurs when the underlying security closes near the middle strike price(s) at the expiry date. The wingspread is the difference between the high and low strike prices.

BREAKING DOWN 'Wingspread'

The basic strategy of selling options at a certain price while buying options on each side of that price is called the butterfly. Variations include the short butterfly, in which the investor holds short positions rather than long; the unbalanced butterfly, in which the wings are asymmetrical; and the iron butterfly, which uses both call and put options instead of one or the other.

On the expiry date, the total value of the set of options will be zero if the underlying security price falls above the high wing or below the low one. Generally speaking, the shorter the wingspread, the greater the potential profit, but also the greater chance of no profit at all.

RELATED TERMS
  1. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly ...
  2. Iron Butterfly

    An options strategy that is created with four options at three ...
  3. Bear Call Spread

    A type of options strategy used when a decline in the price of ...
  4. Out Of The Money - OTM

    A call option with a strike price that is higher than the market ...
  5. Bull Put Spread

    A type of options strategy that is used when the investor expects ...
  6. Deep Out Of The Money

    An option with a strike price that is significantly above (for ...
Related Articles
  1. Options & Futures

    Advanced Option Trading: The Modified Butterfly Spread

    This strategy provides traders with the flexibility to craft a position with unique risk/reward characteristics.
  2. Options & Futures

    Setting Profit Traps With Butterfly Spreads

    The OTM butterfly spread offers traders three unique advantages, and can lead to consistent profits. Find out how.
  3. Options & Futures

    What's the Strike Price?

    The strike price is the price at which a derivative can be exercised, and refers to the price of the derivative’s underlying asset. In a call option, the strike price is the price at which the ...
  4. Options & Futures

    When Should I Sell A Put Option Vs A Call Option?

    Beginning traders often ask not when they should buy options, but rather, when they should sell them.
  5. Active Trading

    How To Manage A Bull Call Spread

    A bull call spread, also called a vertical spread, involves buying a call option at a specific strike price and simultaneously selling another call option at a higher strike price.
  6. Stock Analysis

    Profit With Less Risk With This Options Strategy

    Capital preservation and minimizing losses should be the most important objectives of any investor or trader. Warren Buffett is credited with the saying: Rule No. 1: Never lose money Rule No. ...
  7. Options & Futures

    Profiting From Stock Declines: Bear Put Spread Vs. Long Put

    If you're bearish, you should compare the risk/reward characteristics of these two strategies.
  8. Stock Analysis

    Advanced Butterfly Spread Strategies

    A real trade example shows that a complex butterfly option strategy can be made easier to comprehend and execute by breaking it down into two separate vertical spreads. This article will examine ...
  9. Options & Futures

    Bear Put Spreads: A Roaring Alternative To Short Selling

    This strategy allows you to stop chasing losses when you're feeling bearish.
  10. Options & Futures

    Understanding Bull Spread Option Strategies

    Bull spread option strategies, such as a bull call spread strategy, are hedging strategies for traders to take a bullish view while reducing risk.
RELATED FAQS
  1. How does the term 'in the money' describe the moneyness of an option?

    Find out what in the money means about the moneyness of call or put options and what it indicates about the relationship ... Read Answer >>
  2. How are call options priced?

    Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >>
  3. How do I set a strike price in a put?

    Learn about put options, considerations to make before you select strike prices and how to select strike prices for your ... Read Answer >>
  4. When is a call option considered to be "in the money"?

    Learn about call options, their intrinsic values and why a call option is in the money when the underlying stock price is ... Read Answer >>
  5. How do speculators profit from options?

    As a quick summary, options are financial derivatives that give their holders the right to buy or sell a specific asset by ... Read Answer >>
  6. When is a put option considered to be "in the money"?

    Learn about put options, what they are, how these financial derivatives operate and when put options are considered to be ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center