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Trading Commodities, Commodity Options and Currencies (Collection) by Carley Garner, Paul Brittain

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chapter 9Limited Risk Range Trades

By definition a butterfly is an option spread consisting of more than two different options, usually consisting of a combination of both long and short options. It actually resembles a butterfly, having a central “body” as well as “wings.”

An iron butterfly, sometimes referred to as a diamond butterfly, is an alternative to outright long option trading. It allows traders to enter the market with limited risk and provides a large range in which the trade returns a profit. We like to call this the profit playground.

Unlike outright long options or futures contracts, a diamond butterfly is capable of returning a profit in a market that is trading sideways. An iron butterfly consists of two long options ...

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