A Butterfly Spread is an options strategy that combines bull and bear spreads with a predetermined risk and profit cap. It is also a complex strategy that involves buying two out-of-the-money options and selling two in-the-money options on the same underlying asset with the same expiration date. But once you get the hang of it, the butterfly spread can be a versatile and profitable trading strategy.The butterfly spread is a neutral options strategy that is created by buying an out-of-the-money call option and selling two out-of-the money call options and also the underlying asset. Similarly, it creates a debit by buying an out-of-the money put option and selling two out-of money put options and also the underlying asset. The butterfly spread is a debit spread because it involves four options but the net cost of opening this position is always more than $100.The butterfly spread is a neutral strategy because it has limited profit potential on both sides but limited risk. While the maximum loss is limited to the cost of opening the position but the maximum gain is unlimited.The butterfly spread is a limited profit and limited risk strategy but it has unlimited profit potential and unlimited risk if the underlying asset price moves in the same direction as the strike prices of the options that are being used to construct the butterfly spread.
