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.

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RELATED FAQS
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