butterfly spread investment & finance definition
An
option strategy to sell several call options and at the same time buy several
call options on the same secu-rity or futures contract. The options have
different maturity dates and the exercise price of the options will differ. If
the underlying security makes no dramatic moves, the options trader hopes to
make a profit by collecting income from the premiums. The strategy limits both
risk and profit potential. For instance, one call is bought at the lowest
strike price, $35 for Company A’s stock. Then two calls are sold at $40, which
is the middle strike price. Then a call is bought at $50, the highest stock
price.
See butterfly spread in Wall Street Words
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.