Butterfly spread
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Direction
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Neutral
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Strategy Type
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Income generation
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Legs
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Buy ITM call
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Sell 2 ATM calls
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Buy OTM call
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Max Reward
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Short call strike - lowest long call strike
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Max Risk
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Buyers premium - sellers premium
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Time Horizon
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Long or short
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Risk Profile
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High
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Payoff Diagram
Description
The butterfly allows the investor to benefit from low volatility in price. Greatest profit is achieved when stock price is at the strike price of the short calls.
Steps Involved
Buy one out of the money call, sell two at the money calls and buy one in the money calls.
Rational
A butterfly spread can be utilised when low volatility is expected.