Butterfly Spread Option || Omnath Dubey

A 'Butterfly Spread' is a popular options trading strategy that is used to profit from a narrow range of price movement in an underlying asset. It involves buying and selling three different options contracts, all with the same expiration date, but with different strike prices.

The butterfly spread is constructed by buying one at-the-money option, selling two out-of-the-money options, and buying one further out-of-the-money option. The options are typically all calls or all puts, depending on whether the trader has a bullish or bearish outlook on the underlying asset.

The strategy is called a butterfly spread because the resulting profit and loss diagram looks like a butterfly with wings. The maximum profit is realized when the price of the underlying asset is at the middle strike price at expiration. In this scenario, the trader profits from the options contracts they have sold, which expire worthless, and the options contracts they have bought, which have increased in value.

If the price of the underlying asset at expiration is above or below the middle strike price, the trader will realize a smaller profit or a loss. The maximum loss is the cost of the options contracts purchased minus the premium received from the options contracts sold.

Butterfly spreads are often used by traders when they expect the price of an underlying asset to remain relatively stable within a certain range, and they want to profit from the premium received from selling options contracts. They can also be used as a hedging strategy to limit potential losses from a position in the underlying asset. However, like all options trading strategies, butterfly spreads involve risks and should only be used by experienced traders who understand the potential risks and rewards.