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Published On: Wed, Mar 6th, 2013

Butterfly Spread

A Butterfly Spread is a derivatives option trading strategy in which a position is net neutral.

This is done by combining bull and bear spreads into what are called legs.  The Butterfly Spread is set up by buying and four option contacts simultaneously with the same expiration date.  The difference in the contacts is mainly through the contracts having different strike prices.  This has the effect of creating a spread out range of prices in which the contracts will be profitable.   Either calls or puts can be used in the setting up of the Butterfly Spread.  The trading strategy is considered to be a Neutral strategy.  It is also considered to be one of the most expensive strategies, as the four legs of the strategy would cost the trader four individual commission charges.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

 

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