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.

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. 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. Investing Basics

    Explaining Options Contracts

    Options contracts grant the owner the right to buy or sell shares of a security in the future at a given price.
  2. Home & Auto

    When Are Rent-to-Own Homes a Good Idea?

    Lease now and pay later can work – for a select few.
  3. Technical Indicators

    Using Moving Averages To Trade The Volatility Index (VIX)

    VIX moving averages smooth out the natural choppiness of the indicator, letting traders and market timers access reliable sentiment and volatility data.
  4. Home & Auto

    When Getting a Rent-to-Own Car Makes Sense

    If your credit is bad, rent-to-own may be a better way to purchase a car than taking out a subprime loan – or it may not be. Get out your calculator.
  5. Options & Futures

    An Introduction To Value at Risk (VAR)

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  6. Investing

    Looking To Begin Trading In The Stock Market?

    If you are a new trader, we explain the differences between penny stocks and options so you can make the best decision for your personal trade plan.
  7. Options & Futures

    How to Trade Options on Government Bonds

    A look at trading options on debt instruments, like U.S. Treasury bonds and other government securities.
  8. Investing Basics

    How Does a Collar Work?

    Collar refers to a protective options strategy that investors use after a stock has experienced substantial gains.
  9. Options & Futures

    Long on Oil? Hedge Falling Oil Prices with Options

    With no end to the oil slump in sight, here are some risk management strategies using options to protect your oil positions.
  10. Investing Basics

    Explaining Interest Rate Parity

    Interest rate parity exists when the expected nominal rates are the same for both domestic and foreign assets.
RELATED FAQS
  1. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  2. What are common delta hedging strategies?

    The term delta refers to the change in price of an underlying stock or exchange-traded fund (ETF) as compared to the corresponding ... Read Full Answer >>
  3. How do I determine the breakeven point for a short put?

    The breakeven point for a short put is the strike price of the option minus the premium. Selling puts is a way for traders ... Read Full Answer >>
  4. What options strategies are best suited for investing in the retail sector?

    Retail is a broad sector whose seven discrete segments all exhibit greater volatility than the broader market. The sector ... Read Full Answer >>
  5. What techniques are most useful for hedging exposure to the telecommunications sector?

    A couple of option strategies can be used to hedge exposure to the telecommunications sector. Certain option strategies can ... Read Full Answer >>
  6. What option strategies can I use to earn additional income when investing in the ...

    Investors who are bullish on the industrial sector can use a covered call option strategy to earn additional income from ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  2. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  3. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  4. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  5. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  6. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!