Butterfly Spread

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Definition of 'Butterfly Spread'

A Butterfly Spread is an option strategy that combines a bull and bear spread using three strike prices. Using calls, you would buy 1 in-the-money call, sell 2 at-the-money calls, and buy 1 out-the-money call. This would create a long butterfly spread, also called a long call butterfly.

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Long Butterfly Spread

The lower two strike prices are used in the bull spread, and the higher strike price in the bear spread. Both puts and calls can be used to create a butterfly spread.

One of the advantages and attractions of options is that they have limited risk and unlimited profit potential. The butterfly spread, however, removes the potential for unlimited profit and creates a strategy that has limited risk and limited profit.

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