A butterfly (also: butterfly spread ) is an option strategy in which one speculates with options (i.e. derivative financial instruments ) on prices of the underlying that will hardly change or remain the same . A spread is a portfolio of two or more options of the same type.
The way it works is very similar to a short straddle , but you can reduce the risk of loss with a butterfly. In addition, the butterfly spread is overall cheaper than the straddle due to the double short position.
To construct a butterfly, for example, you can buy two call options at two different exercise prices, and you can also sell two call options at an exercise price that lies between the two calls bought. The exercise date is the same for all options. This example shows the payment diagram opposite.