Butterfly Spread
IntermediateA butterfly spread is an options strategy that combines options at three different strike prices to profit if the underlying asset's price stays close to a particular level at expiry, with limited risk and limited reward.
A common version, the long call butterfly, involves buying one call at a low strike, selling two calls at a middle strike and buying one call at a high strike, all with the same expiry. The strikes are usually equally spaced.
For example, with a share trading at 100, an investor buys one call with a strike of 95, sells two calls with a strike of 100 and buys one call with a strike of 105, for a total net cost of 1.50. If the share finishes exactly at 100 at expiry, the 95 call is worth 5 and the others expire worthless, giving a profit of 3.50. If the share finishes below 95 or above 105, the investor loses the 1.50 paid.
The butterfly is a low-cost way to bet that the price will stay near a target. Maximum profit is achieved at the middle strike, and the maximum loss is the net premium paid.
Because it involves several options, a butterfly spread has higher trading costs, and precise outcomes depend on the price at expiry. It is mainly used by experienced options traders.
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