What is the meaning of ‘Butterfly Spread Option’?
A Butterfly Spread Option is a neutral strategy with limited risk. Also known as a Butterfly Option Spread it involves a combination of bull and bear spreads. Four option contracts with same expiry date at three strike points are combined by the holder. It creates a perfect price range and profit for the holder. A trader thus buys two contracts-one at a higher price and the other at a lower one. They are then sold at a strike price which is in between i.e. a middle strike price. It generally involves the following:
- Buying/Selling of Call/Put Options
- Underlying Asset
- Combination of Four Option Contracts
- Contracts with different strike prices
- Same Expiry Date