butterfly spread

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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
Now I just need some butterfly spread to go with it.
The butterfly spread measuring yield differences between two-, five- and seven-year Treasury notes was 31.7 basis points, the lowest since June 18 based on closing levels, reflecting demand for the middle security over the other two.
In this paper we present a spectral method based on the improved Lagrange formula to compute European, digital, and butterfly spread options.
Within each of the categories described above (vertical, horizontal, diagonal), a spread can also be characterized as a bull spread, bear spread, or butterfly spread. A bull spread is the combination of a long position at a lower strike price and a short position at a higher strike price.
Who knows, a creepy-crawly creature, a miserable worm with a black belly as its body, might one day transmogrify into a magnificent waif like myself ." And so saying, the butterfly spread its glorious wings, took flight and became one with the sky above.
By that stage, I had also developed the lupus rash, which looked like a big red butterfly spread across my cheek.
Third large call butterfly spread in the big cap banking names Thursday.
Size call butterfly spread in Wells Fargo after earnings.
Meanwhile, Apr 49, 50, 50.5, and 51.5 calls are most active in the product, being driven by an Apr 49 - 50 - 50.5 - 51.5 call butterfly spread, which appears to roll long April 50 - 51.5 call spreads opened earlier this week to a new bullish position in April 49 - 50.5 call spreads.
If so, the new position is a Jan 31st 271 - 273 - 275 put butterfly spread, which offers a max payout if the S&P 500 falls another 3.2% and SPY is at $273 by end of business tomorrow.
A total of 92K calls and 82K puts trade in the first two hours Tuesday, or about 60% the typical levels, and the biggest trade in the VIX pit so far today seems to be targeting a 15 settlement print at the June 19th expiration: 16K VIX Jun 14 - 14 - 16 put butterfly spreads bought for 16c.