Do you have an ITM butterfly spread that you're trying to close as a whole near or on expiration day, but having difficulty getting a fill? Well, it's not you, but rather the fact that when a butterfly is in-the-money, there is not much edge for the market maker or a counterparty to fill the order.
How to Close an ITM Butterfly spread
In short, close the butterfly in two orders
Since butterfly spread is a long debit spread and a short credit spread pinned on the short strike, the best way to close out of it is by doing TWO separate balanced closing orders–an order for the debit spread and a closing order the credit spread.
Example of an ITM Butterfly Spread
Let's say you sold a 1-lot call +95/-100/+105 ($5-wide) call butterfly that is completely ITM.
- Order #1 for the debit spread: +95C/-100C, close for a $4.95 credit.
- Order #2 for the credit Spread: -100C/+105C, close for a $5.05 debit.
By adjusting the price +/- $0.05 from the spread width for a one-lot it can help with inducing a fill and help you save the $5/leg exercise and assignment fee.
How to Close an OTM Butterfly spread
You can close it in two order as long as your long leg has a bid
Before you attempt to close a butterfly spread, you'll want to check and see if your long legs have a bid (not a 0.00). If the long legs on your butterfly spread have a 0.00 bid, then you may only close the short leg by buying it back for a debit, typically for a $0.01-$0.05 debit. After your short leg is closed, you can set up a closing order for each of your long legs to close at a $0.01 credit, and if a bid appears, then it may close.