What Is A Butterfly Spread
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A Butterfly Spread is an advanced option selling strategy where the trader places a theta positive trade in an effort to take advantage of a range bound stock, commodity, or other underling.
The Butterfly Spread profits from the theta being drained from the options that were sold. At the time the trader sold the options, the trader also purchased options some distance away from the short strikes or the strikes being sold. These are sometimes referred to as ‘wings’.
There are several various butterfly option strategies – versions if you will – of the butterfly option spread strategy. These different versions are know as the call butterfly, the put butterfly, the iron butterfly, the broken wing butterfly, the modified butterfly, the skewed butterfly, and the reverse butterfly.
Option sellers are drawn to the butterfly spread for a variety or reasons, including the large amount of premium the can capture due to the fact they are selling options which are At The Money – bringing in the highest value of time premium available.
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