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Finance Dictionary and Glossary of Investment Terms
Butterfly Spread
Definition 1.
An option strategy combining a bull and bear spread. It uses three strike prices. The lower two strike prices are used in the bull spread, and the higher strike price in the bear spread. Both puts and calls can be used.
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Definition 2.
An options strategy built on four trades at one expiration date and three different strike prices. For call options, one option each at the high and low strike price are bought, and two options at the middle strike price are sold. For put options, the trades are reversed. This is a limited risk, limited return strategy that pays off when the price of the underlier remains around the middle strike price. This strategy is essentially a combination of a bull and bear spread.
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