What is a Butterfly Spread?
A butterfly spread is an options trading strategy that involves a combination of both calls and puts, with three different strike prices. It is a limited risk, non-directional options strategy that is designed to have a high probability of earning a limited profit when the underlying security is perceived to have low volatility. The butterfly spread is created by combining a bull spread and a bear spread.
History of the Butterfly Spread
The butterfly spread is a relatively new options trading strategy, having been developed in the late 1990s. It was created by combining two other options strategies, the bull spread and the bear spread. The butterfly spread is a popular strategy among options traders because it offers a high probability of earning a limited profit with limited risk.
Comparison of Butterfly Spreads
| Strategy | Max Profit | Max Loss |
|---|---|---|
| Long Butterfly Spread | Difference between middle strike price and lower strike price | Difference between middle strike price and higher strike price |
| Short Butterfly Spread | Difference between middle strike price and higher strike price | Difference between middle strike price and lower strike price |
Summary
The butterfly spread is a limited risk, non-directional options trading strategy that is designed to have a high probability of earning a limited profit when the underlying security is perceived to have low volatility. It is created by combining a bull spread and a bear spread. For more information about the butterfly spread, you can visit websites such as Investopedia, The Options Industry Council, and The Motley Fool.
See Also
- Bull Spread
- Bear Spread
- Straddle
- Strangle
- Iron Condor
- Long Call
- Short Call
- Long Put
- Short Put
- Covered Call
