What Is a Butterfly Spread
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What is a butterfly spread trade.
A butterfly spread is an options spread trade that takes advantage of the fact that options are decaying assets.
Butterfly spread traders SELL the options that have the MOST time premium - or the options that the MOST ‘fake’ or ‘unreal’ value.
As long as the underlying they are trading stays within a range - which the probabilities say they should - the trader should be able to ‘capture’ a large percentage of the TIME value as it disappears into ‘thin air’ - as time goes by.
The closer the trade gets to expiration day - the options will decay at a faster and faster rate.
And the butterfly trader only needs a small fraction of the premium he or she originally brought in by selling the at the money options to realize a very good return on investment.
And what happens if things don’t go so well - and the underlying doesn’t stay within the ideal range?
The trader is then able to utilize the huge amount of premium he or she brought into the trade by selling the At The Money options to ‘fund’ a number of different available adjustment techniques to keep the trade profitable.
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