Butterfly Spread

This is basically a combination of Bull Spread and Bear Spread. The main feature of this strategy us that your risk is fixed and your upside/profit is capped. Selling options with the same strike price and also buying options with the same expiration months, but higher and lower strike prices.

Generally, the butterfly is in a ratio of two-to-one, with two short options forming the body, an option with a higher strike forming one wing and an option with a lower strike creating the other wing. Butterfly spreads can be created with puts or calls.

See also Iron Butterfly

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