butterfly spread


An options strategy built on four trades at one expiration date and three different strike prices. For call options, one option each at the high and low strike price are bought, and two options at the middle strike price are sold. For put options, the trades are reversed. This is a limited risk, limited return strategy that pays off when the price of the underlier remains around the middle strike price. This strategy is essentially a combination of a bull and bear spread.

Use butterfly spread in a sentence

My hedge fund manager believed that the price of shares of the Nakatomi Corporation would stay stagnant, so he used a butterfly spread option trade to profit.

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In the options market, it is quite important to hedge yourself to limit losses, and the butterfly spread shwos a cheap great way to limit losses as well as cap profitability

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