Definition
A butterfly spread is a neutral options strategy using three strike prices. It involves buying one lower strike, selling two middle strikes, and buying one higher strike (all calls or all puts). Maximum profit occurs if the stock closes exactly at the middle strike at expiration.
Formula
Max Profit = Middle Strike - Lower Strike - Net Debit
Example
Buy $95 call, sell 2x $100 calls, buy $105 call for $1 debit. Max profit $400 if stock closes at exactly $100.
FAQ
What is Butterfly Spread?
A neutral strategy combining bull and bear spreads with a shared middle strike.
How do you calculate Butterfly Spread?
A common formula for Butterfly Spread is: Max Profit = Middle Strike - Lower Strike - Net Debit
Why is Butterfly Spread important?
Butterfly Spread helps investors evaluate options and make more informed decisions.