Butterfly Spreads
What It Is
A butterfly spread is a multi‑leg options strategy that profits when the underlying asset stays near a specific price at expiration.
Why It Matters
It offers low‑cost, defined‑risk exposure to low‑volatility environments.
How It Works
- Buy one lower‑strike option
- Sell two at‑the‑money options
- Buy one higher‑strike option
- Maximum profit occurs at the middle strike
Key Components
- Three‑strike structure
- Low volatility expectation
- Defined risk and reward
- Narrow profit zone
Example
A $45/$50/$55 call butterfly profits most if the stock expires near $50.
Key Takeaways
- Butterflies target specific price levels.
- They are inexpensive to enter.
- Best for low‑movement forecasts.