What is a Butterfly Strategy?

A butterfly strategy is an options trading strategy that involves using either three calls or three puts in a ratio of 1-2-1. It is designed to benefit from low or high volatility in the stock price, offering fixed risk and capped profit.

Long Butterfly

A long butterfly is a strategy when you expect the price of the underlying security will stay the same within a certain time period. It is created with either three calls or three puts by buying one in-the-money option with a lower strike price, selling two at-the-money options, and buying one out-of-the-money option with a higher strike price. The higher and lower strike prices are the same distance from the at-the-money strike price.

Short Butterfly

A short butterfly is a strategy when you expect the price of the underlying security will not stay the same (go up or down) within a certain time period. It is created with either three calls or three puts by selling one in-the-money option with a lower strike price, buying two at-the-money options, and selling one out-of-the-money option with a higher strike price. The higher and lower strike prices are the same distance from the at-the-money strike price.

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Option trading entails significant risk and is not appropriate for all investors. Option investors can rapidly lose the entire value of their investment in a short period of time and incur permanent loss by expiration date. You need to complete an options trading application and get approval on eligible accounts. Please read the Characteristics and Risks of Standardized Options before trading options.