A butterfly spread is an options strategy that involves a combination of both calls and puts, with the same expiration date but three different strike prices. It is used to capitalize on a neutral outlook on the underlying asset.
A butterfly spread is an options trading strategy that involves a combination of both calls and puts, with the same expiration date but different strike prices. The strategy is designed to take advantage of a stock’s limited price movement. It is a limited risk, non-directional options strategy that is designed to have a high probability of earning a small limited profit when the underlying stock price does not move much by expiration.
The butterfly spread is created by buying one call option at the lowest strike price, selling two call options at a higher strike price, and then buying one call option at an even higher strike price. All of the options have the same expiration date. The maximum profit potential of the butterfly spread is the difference between the middle strike price and the higher strike price, less the net debit paid to enter the position. The maximum loss is the net debit paid to enter the position.
The butterfly spread is a popular strategy for traders who are looking to take advantage of a stock’s limited price movement. It is a low-risk strategy that can be used to generate a small profit when the underlying stock price does not move much by expiration. The strategy is also relatively easy to understand and execute, making it a great choice for novice traders.