We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What are Butterfly Options?

Malcolm Tatum
By
Updated May 17, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Butterfly options are options involved in an investment strategy that is structured to provide a limited amount of returns even if the degree of risk associated with the underlying assets of the options should change over the future. The process involves utilizing a series of long and short calls in order to create a pattern that helps to insulate the investor from incurring any losses, even if the implied risk associated with the options is different from the future risk that eventually emerges. As with many options strategies, structuring butterfly options requires careful planning and selection and an attention to detail in order to succeed.

There are actually two different types of butterfly options. One is known as the long butterfly. With this arrangement, all the options involved will have the same expiration date. The series of calls will involve a long call that has a strike price that is slightly lower than the benchmark, followed by two short calls at the benchmark. As the final phase of the process, a long call is initiated at a price slightly higher than the strike price. The combination helps to offset the chance for loss overall, allowing the investor to effectively minimize the chances for loss while helping to improve the chances for earning at least a modest return.

Short butterfly options also use either a series of calls or sometimes a combination of puts and calls in order to produce the desired result. The difference is that with a short butterfly approach, the combination of short and long calls is reversed, meaning that where long calls are used in the long butterfly, short calls are substituted. At the same time, the short calls in the long butterfly are replaced with long calls in the short butterfly approach. This arrangement, assuming the selection of options is ideal, is more likely to produce revenue if the future volatility of the options is greater than the implied volatility.

The timing in butterfly options is very important to the success of the strategy. Along with choosing the right options, it is key that the changes in volatility are observed throughout the process, and that each of the calls involved are initiated at just the right time. While somewhat complicated, this approach is capable of producing returns that make the time and effort worth it to many investors. Typically, newer investors only attempt this approach by working closely with a seasoned broker who is capable of identifying the right combination of options and could also advise as to the timing of each call.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.