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 1Buy 1 lower strike (ITM) callThere are two key points here:
Step 2Sell 2 middle strike ATM calls1The ratio between buying the ITM call, selling the ATM calls, and buying the OTM call is 1:2:1.
Step 3Buy 1 higher strike (OTM) call2The 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 1Buy 1 lower strike (OTM) putThere are two key points here:
Step 2Sell 2 middle strike ATM puts1The ratio between buying the OTM put, selling the ATM puts and buying the ITM put is 1:2:1.
Step 3Buy 1 higher ...

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