Butterfly Spread

A butterfly spread uses three equally spaced strike prices with the same expiration. The trader buys one option at the lowest strike, sells two options at the middle strike, and buys one option at the highest strike. It can be constructed with all calls, all puts, or a combination (iron butterfly). The maximum profit occurs when the underlying expires exactly at the middle strike price, and the maximum loss is limited to the net premium paid (for long butterflies). This strategy is ideal for traders who expect low volatility and believe the underlying will remain near a specific price. The risk/reward ratio is attractive because the maximum loss is small relative to the potential profit, though the probability of maximum profit is relatively low.