Wingspread

AAA

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.

INVESTOPEDIA EXPLAINS '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. Short Call

    A type of strategy regarding a call option, which is a contract ...
  2. Short Date Forward

    A forward exchange contract involving two parties that agree ...
  3. Short-Term Paper

    Financial instruments typically with original maturities of less ...
  4. Net Short

    A condition in which an investor has more short positions than ...
  5. Short Straddle

    An options strategy carried out by holding a short position in ...
  6. Short Market Value

    The market value of securities sold short through an individual's ...
Related Articles
  1. Options & Futures

    Options and Roth IRAs: Do's and Don'ts

    A breakdown of the do's and don'ts of trading options in a Roth IRA.
  2. Options & Futures

    5 Secrets You Didn't Know About Roth IRAs

    Between its generous tax benefits at retirement and no required minimum distributions, a Roth IRA is well worth considering if you're eligible to have one.
  3. Forex Strategies

    The 10 Riskiest Investments

    Investors seeking high returns must also be prepared for high risk. Here are ten of the riskiest investments available.
  4. Options & Futures

    Trade Covered Calls On High Dividend Paying Stocks

    We explain the risks, rewards, timing, and profit and loss considerations for covered calls with dividend stocks.
  5. Options & Futures

    Was Buffet Right about Derivatives as WMDs?

    Why Warren Buffet described derivatives as weapons of mass destruction, and when can they be helpful or harmful?
  6. Options & Futures

    Trading Volatility? Don’t Trade Stocks, Trade Options

    During times of volatility, traders can benefit greatly from trading options rather than stocks. We explain why.
  7. Options & Futures

    Top Brokers Offering Tools For Covered Calls

    Here are the brokers that offer the best tools for investors and traders to write covered calls and covered puts.
  8. Economics

    Effects of OIS Discounting for Derivative Traders

    The use of OIS discounting has important implications for derivative valuations and could positively or negatively impact a trader's profit or loss.
  9. Options & Futures

    The Perks of Trading Coffee Options

    As more people begin to trade coffee, we explain how coffee options work, who uses them, what drives valuations, and the risks and rewards.
  10. Trading Strategies

    Top Day Trading Instruments

    Day trading is an intense and often appealing activity. Investopedia provides the list of top financial instruments for day trading.

You May Also Like

Hot Definitions
  1. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  2. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  3. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  4. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  5. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  6. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
Trading Center