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holder and thus is subject to the increased risk of being
directly subject to the market. To minimize this increased risk,
the holder would obtain a new position similar to the one in the
closed loss leg, except for a different month. This substitution
of one position for a similar position in a different month
(switching) of the loss leg in the initial year in order to
generate a tax loss which is offset by the unrealized gain in the
other leg of the straddle is a pattern usually found in the
trading of tax straddles. Ewing v. Commissioner, 91 T.C. at 401.
A "butterfly spread" has three legs maturing at different
times. If the first and third legs are long, then the middle
position is short. If the first and third legs are short, then
the middle position is long. The outlying positions (first and
third legs) are referred to as wings and the center position as
the body, hence the term "butterfly".
The center position or body of a butterfly spread is twice
as large as either wing, and the time periods for the delivery of
the commodity from the first wing to the body and from the body
to the second wing are equal. Essentially, a butterfly spread
creates two spreads, one bullish and one bearish. Thus, a
butterfly spread presents less chance of either an adverse or a
favorable spread movement and is, therefore, less likely to
result in a different loss or gain than an ordinary straddle. An
example of a butterfly spread would be as follows:
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Last modified: May 25, 2011