What is the Butterfly Strategy?
A call option is the right to buy a given asset at a fixed price on or before a specific date. A put option is the right to sell a given asset at a fixed price on or before a specific date. Calls increase in value when the price of the underlying asset goes up; puts increase in value when the price of the underlying asset goes down. A butterfly strategy is an options strategy using multiple puts and/or calls to make a bet on future volatility without having to guess in which direction the market will move. A long butterfly strategy is constructed from three sets of either puts or calls having the same expiration date but different exercise prices (strikes). For example, with the underlying asset trading at 100, a long butterfly strategy can be built by buying puts (or calls) at 95 and 105, and selling (shorting) twice as many puts (or calls) at 100. If the underlying does not change price by expiry, the puts at 95 and 100 will expire worthless, and the puts at 105 will be worth 5 (from
Related Questions
- When I compare strategies, the strategy that resets the withdrawal rate every five years always has a 100% success rate even though the final income is lower than I need. Why?
- Some strategies have not been validated by research. How can I tell if a new or emerging strategy is likely to be effective?
- What is the Butterfly Strategy?
