What is a call butterfly spread?

A call butterfly spread, also known as a long butterfly, is a neutral options strategy with defined risk and limited profit potential. The strategy looks to take advantage of a drop in volatility, time decay, and little or no movement from the underlying asset.

What is a butterfly spread trading strategy?

Butterfly spread is a trading strategy that involves open call or put options at a one strike price offset by transactions at a higher and a lower strike price simultaneously. This strategy yields a finite profit or results in a limited loss.

Do butterfly spreads pay off the most?

Butterfly spreads pay off the most if the underlying asset doesn't move before the option expires. These spreads use four options and three different strike prices. The upper and lower strike prices are equal distance from the middle, or at-the-money, strike price. Butterfly spreads are strategies used by options traders.

How does XYZ butterfly spread work?

Suppose investor A buys stocks of company XYZ, trading at $50. As the investor thinks the prices will fluctuate in the next few months, A chooses to go for a short call butterfly spread. Accordingly, the trader buys two call options at a strike price of $50 while selling two call options at $45 and $55.