Our word of the day is “Butterfly Spread” A butterfly strategy involves four options

with three strike prices. For a call strategy, an investor can buy one call at the lowest

price, sell two calls at the middle strike price and buy one call at the highest strike

price. A butterfly spread put strategy can be developed

by buying one put at the highest price, selling two at the middle price and buying one put

at the lowest price. Confused yet?

Because of the different positions, both risk and return are somewhat limited. What's not

limited is the amount of commissions you'll pay your broker on eight options transactions,

making butterfly spreads a strategy that should be avoided by most individual investors.

The butterfly spread is a neutral strategy that is a combination of a bull spread and

a bear spread. It is a limited profit, limited risk options strategy. There are 3 striking

prices involved in a butterfly spread and it can be constructed using calls or puts.