Butterfly Spread Definition

Dictionary of Financial Terms

A strategy involving four options with three strike prices. For a call strategy, an investor can buy one call at the lowest price, sell two calls at the middle strike price and buy one call at the highest strike price.

A butterfly spread put strategy can be developed by buying one put at the highest price, selling two at the middle price and buying one put at the lowest price. Confused yet?

Because of the different positions, both risk and return are somewhat limited. What's not limited is the amount of commissions you'll pay your broker on eight options transactions, making butterfly spreads a strategy that should be avoided by most individual investors.

Definitions of Financial Terms