Butterfly Strike
The short strikes of the butterfly spread are usually sold ATM (at the money). Strikes that are at the money have the most ‘Time Premium’. Time premium is what will erode away making the butterfly spread trader / option seller money.
Butterfly spreads are 3 legged trades. Again, the short strikes are sold at the money - and the wings are purchased in equal distance apart from the shorts. One could think of the butterfly spread as the sale of a straddle - with a strangle purchased around it.
Sometimes, if the underlying isn’t sitting exactly at a strike price at the time a butterfly trade is placed, the trader could place a ’split strike’ butterfly - where the short legs of the trade are sold at two strikes next to each other - or very near each other.
For example, lets say that a trader wishes to place a trade on SPX when SPX is trading at 997.
Because SPX is trading almost exactly between the only available strikes (995 and 1000) it might make more sense to the trader to place a split strike butterfly to help in keeping closer to delta nuetral.
A split strike butterfly in this example would look something like this:
Buy 1 990 call
Sell 1 995 call
Sell 1 1000 call
Buy 1 1005 call
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