Stock Option Terms: Butterfly Spread

Butterfly Spread:
A butterfly spread is a 3-leg option trading strategy using all calls or all puts.

Calls:
1. Buy a lower strike in the money call
2. Sell 2 middle stirke at the money calls
3. Buy a higher strike out of the money call

Puts:
1. Buy 1 lower strike out of the money put
2. Sell two middle strike at the money puts
3. Buy 1 higher strike in the money put.

The butterfly spread will be a net debit transaction and has two breakeven scenarios; one to the upside and one to the downside.