butterfly spread

Butterfly Spread

An option strategy combining a bull and bear spread. It uses three strike prices. The lower two strike prices are used in the bull spread, and the higher strike price in the bear spread. Both puts and calls can be used.

Notes:

This strategy has limited risk and limited profit.

See also: Bear Spread, Bull Spread, Option

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Butterfly spread

Applies to derivative products. Complex option strategy that involves buying a call option with a relatively low strike price; buying a call option with a relatively high strike price; and selling two call options with an intermediate strike price. Essentially, this is a bear call spread stacked on top of a bull call spread. One can also do this with puts. The investor buys a put with a low strike, buys a put at high strike and sells two puts at intermediate strike price. The payoff diagram resembles the shape of a butterfly.

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butterfly spread

A combination of two long and two short call options, all with the same expiration date. The two short options carry the same strike price, which is sandwiched between a higher and a lower strike price on the long options. A hypothetical example of a butterfly spread would be to sell two April GM $60 and buy an April GM $50 and an April GM $70. The butterfly spread is designed to be profitable if the price of the underlying asset remains within a narrow trading range.