What is Butterfly Spread?
A butterfly spread is another strategy used by the traders. We purchase or sell three different call options in the butterfly spread. To build a butterfly spread, the trade purchases one European call with a low exercise price, buys another European call with a high exercise price and sells two European calls with an exercise price in between (usually near the current stock price). One critical aspect is that expiration dates are the same for all options. The trader expects stock prices to remain new to the exercise prices.
Examples of Butterfly Spread:
Let's assume a trader who is building a butterfly spread. They purchased a long call with a strike price of USD 18 with a premium of USD 3, a long call with a strike price of 20 and a premium of USD 1. They also short two calls with a strike price of USD 18 and a premium of USD 2 each. If the price remains around the strike price, the trader will make a profit.