Chapter 23. Butterfly Spreads

The butterfly spread trade is typically a cheap trade with low risk and lots of leverage. The drawback of the butterfly trade is that it focuses on a narrow range of profitability. The trade can be arranged to have a wider profit range, but then it becomes considerably more expensive.

These spreads can be used in various ways. The most common strategy utilizes a butterfly trade to target a strike price toward which a stock or index is trending. They can also be traded with adjustments, although this usually adds additional risk to the trade. Another version of the butterfly has an unbalanced form, so as to favor price movement in one direction.

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