butterfly spread

The placing of two interdelivery spreads in opposite directions with the center delivery month common to both spreads. Chicago Board of Trade glossary

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Established by buying an at-the-money option, selling 2 out-of-the money options, and buying an out-of-the money option. A butterfly is entered anytime a credit can be received; i.e., the premiums received are more than those paid. The CENTER ONLINE Futures Glossary

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Applies to derivative products. Complex option strategy that involves buying a call option with a relatively low strike price; buying a call option with a relatively high strike price; and selling two call options with an intermediate strike price. Essentially, this is a bear call spread stacked on top of a bull call spread. One can also do this with puts. The investor buys a put with a low strike, buys a put at high strike and sells two puts at intermediate strike price. The payoff diagram resembles the shape of a butterfly. Bloomberg Financial Dictionary

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A three-legged option spread in which each leg has the same expiration date but different strike prices. Chicago Mercantile Exchange Glossary

butterfly spreads

Can be futures or options spreads. As an option spread, it is a strategy combining a bull and bear spread and uses three strike prices. The lower two strike prices are used in the bull spread and the higher strike price from the bear spread. Both puts and calls can be used. Chicago Mercantile Exchange Glossary

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( i) A futures butterfly spread is a spread trade in which multiple futures months are traded simultaneously at a differential. The trade basically consists of 2 futures spread transactions with either 3 or 4 different futures months at one differential.

(ii) An options butterfly spread is a spread trade in which multiple options months and strike prices are traded simultaneously at a differential. The trade basically consists of 2 options-spread transactions with either 3 or 4 different options months and strikes at one differential. Exchange Handbook Glossary

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   An option strategy involving the simultaneous sale of an At The Money Straddle and purchase of an Out Of The Money Strangle. Potential gains will be seen if the underlying financial instrument on which the option is based remains stable while the risk is limited should the underlying move dramatically.

   ► See also At the Money, Option, Out of the Money, Straddle, Strangle.