Butterflies
Butterflies are wing spreads similar to condors, but there are only three
strikes involved in the trade—not four.
Long Butterfly
Long one call (put) with strike A; short two calls (puts) with a higher strike,
B; and long one call (put) with an even higher strike, C. The options are on
the same security, in the same expiration cycle, and are either all calls or all
puts. The difference in price between strikes A and B equals that between
strikes B and C.
Long Butterfly Example
Buy 1 XYZ December 50 call (A)
Sell 2 XYZ December 60 call (B)
Buy 1 XYZ December 70 call (C)
Short Butterfly
Short one call (put) with strike A; long two calls (puts) with a higher strike,
B; and short one call (put) with an even higher strike, C. The options are on
the same security, in the same expiration cycle, and are either all calls or all
puts. The vertical spread made up of the options with strike A and strike B
has the same distance between the strike prices of the vertical spread made
up of the options with strike B and strike C.
Short Butterfly Example
Sell 1 XYZ December 50 call
Buy 2 XYZ December 60 call
Sell 1 XYZ December 70 call