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. 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. Options & Futures

    What are the most common momentum oscillators used in options trading?

    Read about some of the most common technical momentum oscillators that options traders use, and learn why momentum is a critical concept for options trading.
  8. Options & Futures

    How are Bollinger BandsĀ® used in options trading?

    Use Bollinger Bands to identify volatility changes and place options trades at the right time; profit in bull or bear markets using these strategies.
  9. Options & Futures

    Stock Futures vs Stock Options

    A full analysis of when is it better to trade stock futures vs when is it better to trade options on a particular stock. A quick overview of how each of them works and why would a trader, investor, ...
  10. Options & Futures

    The Potential Of Low-Priced Options

    The benefits of trading low-priced options, and learning how to pinpoint them, can be a very profitable strategy for an options trader.

You May Also Like

Hot Definitions
  1. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  2. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  3. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  4. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  5. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  6. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
Trading Center