Butterfly Spread
Buy 1 ITM Call / Sell 2 ATM Calls / Buy 1 OTM Call
A Butterfly Spread is a neutral strategy that may be opened with either calls or puts; the profit / loss profile is identical. Butterfly spreads have limited profit potential and limited risk of loss.
The maximum profit is achieved when the underlying equity closes at the ATM strike price at option expiration, and is equal to the difference between the strike prices less premium paid to open the position.
The maximum loss is equal to the premium paid.
Consider the following hypothetical example for a stock trading at $27.52.
A $27 / $28 / $29 butterfly spread (using calls) can be purchased for $0.30 for the current month. A maximum profit of $70 is realized if the stock trades at $28 at option expiration; profit potential is limited to the spread price less the premium paid ($70.00). Below $27.00 or above $29, a maximum loss is realized equal to the option spread price paid ($30).
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If two different ATM strike prices are used, this strategy becomes a Condor Spread.
