Options strategy

Why might you want to bet on a butterfly?

Imagine you're betting on the price of a popular toy next month. You think it won't be too expensive or too cheap.

You bet a little on both extremes, but most of your bet is on the middle price. If the toy's price stays close to the middle bet, you win more than if you bet only on one side.

Example

You bet 1 on the toy being too cheap (15), 1 on it being too expensive (25), and 2 on it being right in the middle (20).

Remember this

A butterfly spread profits by betting the price will stay near the middle bet.

Text adapted from Wikipedia, licensed under CC BY-SA 4.0.

Related concepts

Strangle (options)

Can you profit from big price swings without betting on which way they'll go?

Prediction market

Why does betting on the future cost more to place than to take?

Straddle

Straddle strategy profits from large price movements in either direction

Bull spread

Can you profit from a stock's price jumping up or down?

Observational interpretation fallacy

Why do people think flipping a coin repeatedly will change its outcome?

Bid–ask spread

Bid-ask spread measures transaction costs and liquidity

Educational content, not financial advice.

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