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

RELATED TERMS
  1. Leg Out

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

    1. An option strategy seeking maximum profit when the price of ...
  3. Underlying

    1. In derivatives, the security that must be delivered when a ...
  4. Option

    A financial derivative that represents a contract sold by one ...
  5. Bull Spread

    An option strategy in which maximum profit is attained if the ...
  6. Iron Condor

    An advanced options strategy that involves buying and holding ...
Related Articles
  1. The Butterfly Spread
    Options & Futures

    The Butterfly Spread

  2. Options Basics Tutorial
    Options & Futures

    Options Basics Tutorial

  3. What To Do When Your Options Trade Goes ...
    Options & Futures

    What To Do When Your Options Trade Goes ...

  4. Adjusting A Long Call Into A Butterfly ...
    Trading Strategies

    Adjusting A Long Call Into A Butterfly ...

comments powered by Disqus
Hot Definitions
  1. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  2. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  3. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  6. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
Trading Center