Butterfly Spread

photo credit: dno1967
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 [...]

photo credit: gentlebird
When some option traders look at the risk graph of a butterfly - or the butterfly spread payoff diagram - they can’t understand why anyone would want to trade these things.
When you look at a risk graph representation of the butterfly trade - it can look improbable that the underlying will remain [...]

photo credit: BozDoz
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 [...]