Butterfly

(1) In practice, in a long position, one of the options purchased is generally in the money and the other out of the money, and the options sold are at the money or close to the money. In a short position, one of the options sold is in the money and the other is out of the money, and the options purchased are at the money or close to the money. (2) A butterfly strategy is constructed by combining call options (call butterfly), or put options (put butterfly). In both cases, the strategy results in a net outflow to the buyer and a net inflow to the seller. (3) The graphical representation of a butterfly is in the shape of the wings of a butterfly. This option trade strategy is used to take advantage of the relative stability of the underlying instrument price and has limited risk in the event of a major move in either direction. In a short position, it is used to take advantage of the relative instability of the price of the underlying instrument, in either direction, while limiting the risk in the event of price stability in the underlying. (4) The butterfly is similar to the condor, the difference being that the two options sold (or purchased, in a short position) have the same exercise price. (5) A butterfly spread may also involve futures contracts, for example in a long position, by combining the purchase of a front month contract, the sale of two deferred month contracts and the purchase of a further month contract. The spreads between the expiration months can be different.