Trading Options in Turbulent Markets: Master Uncertainty through Active Volatility Management, 2nd Edition

Chapter 20

The Butterfly Spread

So far you have learned about options spreads that involve buying and selling contracts with just two different strike prices. The butterfly spread is a strategy that involves four contracts with three strike prices. These are somewhat complicated trades, but they can be quite useful in either taking advantage of implied volatility or reducing your exposure to volatility. The butterfly spread offers low risk but also low reward. More important, the butterfly strategy can be a good investment in a time of high volatility because as implied volatility increases, the butterfly spread becomes less expensive to create. Hence you don’t have to fear the butterfly spread because of its complexity. You aren’t likely to ...