Butterfly Spread

AAA

DEFINITION of 'Butterfly Spread'

A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration but three different strike prices to create a range of prices the strategy can profit from. The trader sells two option contracts at the middle strike price and buys one option contract at a lower strike price and one option contract at a higher strike price. Both puts and calls can be used for a butterfly spread.

INVESTOPEDIA EXPLAINS'Butterfly Spread'

Butterfly spreads have limited risk, meaning you can only lose your initial investment. Your maximum return is when the price of the underlying asset remains around the middle strike price.

VIDEO

Loading the player...
RELATED TERMS
  1. Leg Out

    One side of a complex option transaction. Leg out means to close ...
  2. Option

    A financial derivative that represents a contract sold by one ...
  3. Bear Spread

    1. An option strategy seeking maximum profit when the price of ...
  4. Iron Condor

    An advanced options strategy that involves buying and holding ...
  5. Underlying

    1. In derivatives, the security that must be delivered when a ...
  6. Bull Spread

    An option strategy in which maximum profit is attained if the ...
Related Articles
  1. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  2. Options & Futures

    What To Do When Your Options Trade Goes Awry

    Check out some repair strategies to help boost the profit potential of a losing position.
  3. Trading Strategies

    Adjusting A Long Call Into A Butterfly Spread

    There are many key advantages offered to options traders who deal only in the underlying securities.
  4. Options & Futures

    Advanced Option Trading: The Modified Butterfly Spread

    This strategy provides traders with the flexibility to craft a position with unique risk/reward characteristics.
  5. Options & Futures

    Setting Profit Traps With Butterfly Spreads

    The OTM butterfly spread offers traders three unique advantages, and can lead to consistent profits. Find out how.
  6. Options & Futures

    Understanding Option Pricing

    Take advantage of stock movements by getting to know these derivatives.
  7. Investing Basics

    Explaining Absolute Return

    Absolute return refers to an asset’s total return over a set period of time. It’s usually applied to stocks, mutual funds or hedge funds.
  8. Investing Basics

    How To Create Capital Protected Investment Using Options?

    Does "Capital-Protection" guarantee in an investment product sound attractive? Wait! Here's how you can create a better one for yourself, at low-cost!
  9. Options & Futures

    How to Make Money by Trading Index Options

    Index options are less volatile and more liquid than regular options. Understand how to trade index options with this simple introduction.
  10. Investing

    4 Structured Product Types Wealthy Clients Love

    High-net-worth investors find structured products appealing for a variety of reasons. Here's a look at four types.
RELATED FAQS
  1. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  2. What are common delta hedging strategies?

    The term delta refers to the change in price of an underlying stock or exchange-traded fund (ETF) as compared to the corresponding ... Read Full Answer >>
  3. How do I determine the breakeven point for a short put?

    The breakeven point for a short put is the strike price of the option minus the premium. Selling puts is a way for traders ... Read Full Answer >>
  4. What options strategies are best suited for investing in the retail sector?

    Retail is a broad sector whose seven discrete segments all exhibit greater volatility than the broader market. The sector ... Read Full Answer >>
  5. What techniques are most useful for hedging exposure to the telecommunications sector?

    A couple of option strategies can be used to hedge exposure to the telecommunications sector. Certain option strategies can ... Read Full Answer >>
  6. What option strategies can I use to earn additional income when investing in the ...

    Investors who are bullish on the industrial sector can use a covered call option strategy to earn additional income from ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Nanny Tax

    A federal tax that must be paid by people who hire household help (a babysitter, maid, gardener, etc.) and pay them a total ...
  2. Dog And Pony Show

    A colloquial term that generally refers to a presentation or seminar to market new products or services to potential buyers.
  3. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  4. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  5. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  6. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!