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What is butterfly strategy?
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What is butterfly strategy?

A butterfly strategy is combined with either three calls or three puts with a ratio of 1-2-1, with a fixed risk and capped profit. It is a strategy when you perceive the volatility of the stock price to be low or high.

Long Butterfly

A long butterfly is a strategy when you expect the price of the underlying security will stay the same within a certain time period. It is created with either three calls or three puts by buying one in-the-money option with a lower strike price, selling two at-the-money options, and buying one out-of-the-money option with a higher strike price. The higher and lower strike prices are the same distance from the at-the-money strike price.

Short Butterfly

A short butterfly is a strategy when you expect the price of the underlying security will not stay the same (go up or down) within a certain time period. It is created with either three calls or three puts by buying one in-the-money option with a lower strike price, selling two at-the-money options, and buying one out-of-the-money option with a higher strike price. The higher and lower strike prices are the same distance from the at-the-money strike price.

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