How To Handle Butterflies At Expiration

Bull Spread - Long OTM Call Fly (addendum)

A few key characteristics of this spread to take note of.

a) The maximum profit will occur when the underlying trades exactly at the Short strikes; ie SPY = 126. The chance, as mentioned, is low.

b) This spread consists of 4 options, since it involves 2 call spreads. Correspondingly, the commission fees is comparatively higher than most other option spreads.

c) Depending on where the underlying is trading at expiration date, one may not have to close off all the Call positions inherent in this fly.
Supposing, come very close to expiration date, perhaps even on the day this spread is to expire, SPY is trading at $120, making all the Calls Out of The Money, then simply just accept the 0.34 as your maximum losses and let this spread expire worthless. It is pointless to close off this spread, pay another 4 way commissions when there's no benefit for doing so.
Supposing, on expiration day, SPY is trading at $134, even though making all of your Call positions of this fly spread ITM, it is still pointless to expense another 4 way commissions to close off this position, when you would also be experiencing the maximum losses of 0.34. By closing off this position, won't make you a penny richer. Hence, why increase the losses further with commissions payable to exit.

The interesting part, is when SPY, on expiration date, trades between your profitable range of 124.34 and 127.66.

This is a little complex. So bear with me.

If SPY is within 124 and 126 range, you MUST at least sell off the Long124Call position, otherwise, you will be assigned, resulting in you being the proud owner of SPY ETF shares. You could sell of the entire fly spread as well. Which of the two actions to take, is more of an art than an exact science.

Let me explain...supposing you have 1 hour left on expiration date, and SPY is hovering around 125 region and SPY has been struggling to head higher. You think that SPY will not go beyond 126, nor will it drop below 124 within the next hour. Then you could just sell the Long 124Call and let the remaining Calls expire worthless. This will cut down on your trade commissions.

However, if you think there is a good chance that SPY will trade above 126 at the closing bell, then it is best that you close off the entire fly spread. The reason is this; if you had just closed off the Long 124Call position, leaving behind 2 short 126Calls, you are exposing your short calls getting ITM at closing bell. If SPY indeed closes at >126, you will be obligated to deliver SPY ETF shares and if you dont own them, then you will have Short stock positions come monday after expiration. These are not cheap stocks, to short stock, you need to have a huge amount of money in your account to margin this short stock position. If you dont have enough funds in your account, problems will balloon.
(to minimise the complexity of this explanation, the suggestion is to close off the entire fly spread, when in actual fact, you could just close off only the 124Call and 126Calls. Leave the 128Call alone, unless SPY went mad and shoots above 128 at the last minute before closing bell)

Thus, butterflies can be beautiful to look at, but potentially problematic to handle. The advice is, be very familiar with the concepts of this spread before trading the Fly.