What is a butterfly spread?

A butterfly spread is an options strategy that combines both bull and bear spreads. These are neutral strategies that come with a fixed risk and capped profits and losses. 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.

What is a butterfly option?

In finance, a butterfly (or simply fly) is a limited risk, non-directional options strategy that is designed to have a high probability of earning a limited profit when the future volatility of the underlying asset is expected to be lower (when long the butterfly) or higher (when short the butterfly) than that asset's current implied volatility .

What is an Iron Butterfly?

An iron butterfly recreates the payoff diagram of a butterfly, but with a combination of two calls and two puts. The option strategy where the middle options (the body) have different strike prices is known as a Condor.

How does an OTM butterfly work?

An OTM butterfly is built the same way as a neutral butterfly, by buying one call, selling two calls at a higher strike price and buying one more call option at a higher strike price. The critical difference is that with the OTM butterfly, the option that is sold is not the at-the-money option but rather an out-of-the-money option.