butterfly spread

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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.

Butterfly Spread

An option strategy wherein one sells two options with the same strike price and buys two other options, one with a low strike and one with a high strike. The butterfly spread limits both the risk and the profit potential; it is profitable only if the price of the underlying asset remains in a relatively narrow range. One may use a butterfly spread on both calls and puts, but not on both mixed together. See also: bull spread, bear spread.

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.
References in periodicals archive ?
The workshops focus on teaching combination trades, such as butterfly spreads, straddles and strangles and on showing people how options can be used to "insure" against big losses in the market.
TD AMERITRADE's new, single-click strategy choices include butterfly spreads, calendars, diagonals, iron condors, straddles and even customized spreads.
The patent pending Request for Quote (RFQ) methodology on CME Globex provides customers with real-time indicative prices on more than 70,000 outright contracts and complex spread combinations, including calendars, straddles, strangles and butterfly spreads.
Unlike most other futures exchanges, CME will generate both implied "IN" and implied "OUT" bids and offers on butterfly spreads -- CME will use both outright and implied calendar spread and leg orders to derive implied bids and offers on butterfly spreads
Implied "IN" orders in butterfly spreads can be derived from any of the following examples:
Implied "OUT" orders from butterfly spreads can be derived from any of the following examples:
futures exchange, announced today that it has launched new implied butterfly spread trading functionality for CME Eurodollars on Globex(R), the exchange's electronic trading platform.
This first-of-its-kind implied butterfly spread trading functionality on CME Globex further augments the electronic trading environment of our benchmark CME Eurodollar futures," said Chairman Terry Duffy.
Just as the bird reached for the snack, the computer would flash an image of either an owl or a butterfly behind the mealworm as suddenly as an attacked butterfly spreads its startling wings.