butterfly spread - Investment & Finance Definition
An option strategy to sell several call options and at the same time buy several call options on the same secu-rity or futures contract. The options have different maturity dates and the exercise price of the options will differ. If the underlying security makes no dramatic moves, the options trader hopes to make a profit by collecting income from the premiums. The strategy limits both risk and profit potential. For instance, one call is bought at the lowest strike price, $35 for Company A’s stock. Then two calls are sold at $40, which is the middle strike price. Then a call is bought at $50, the highest stock price.Webster's New World Finance and Investment Dictionary Copyright © 2010 by Wiley Publishing, Inc., Indianapolis, Indiana.
Used by arrangement with John Wiley & Sons, Inc.