Master the "Precision Profit." Learn how to target a specific price point with defined, limited risk.
A Butterfly Spread is a neutral strategy that combines bull and bear spreads, with a fixed risk and capped profit. It is constructed by using three different strike prices, all with the same expiration date.
To set up a standard Long Call Butterfly, you:
This creates a profit peak exactly at the middle strike price at expiration. If the asset moves significantly higher or lower, the potential loss is limited to the initial cost of setting up the spread.
This strategy is ideal for traders who expect the stock to stay range-bound near a target price. It is low-cost and offers a high potential return relative to risk. However, it requires precise market timing and price targeting.