Options Made Easy: Your Guide to Profitable Trading, Second Edition

Butterflies

The Butterfly involves the following steps (you can use all calls or all puts with the Butterfly—you cannot mix the two):

Butterfly with Calls

Step 1	Buy 1 lower strike (ITM) call	There are two key points here:
Step 2	Sell 2 middle strike ATM calls	1	The ratio between buying the ITM call, selling the ATM calls, and buying the OTM call is 1:2:1.
Step 3	Buy 1 higher strike (OTM) call	2	The distance between the three adjacent strikes must be equal, with the middle strike being ATM or as close to ATM as possible.

Or:

Butterfly with Puts

Step 1	Buy 1 lower strike (OTM) put	There are two key points here:
Step 2	Sell 2 middle strike ATM puts	1	The ratio between buying the OTM put, selling the ATM puts and buying the ITM put is 1:2:1.
Step 3	Buy 1 higher ...