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Glossary of Terms and Strategies for Options Trading
Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.
Strategy
Advanced, Speculation, Income
Butterfly Spread
A three-strike option strategy that exploits stagnation or specific movement in the underlying. Limited risk and profit.
Detail
Butterfly Spread is an option strategy consisting of three strike options (call or put) with the same expiration. Suitable for situations of market stagnation or expected targeted movement to a certain price. It offers limited profit and limited loss, suitable for more advanced traders.
Butterfly Spread uses a combination of three strike options (call or put) of the same expiration. Typically consists of: buying 1 option with a lower strike, writing 2 options with a middle strike, buying 1 option with a higher strike. Strikes can be ITM, ATM, OTM, depending on what the trader expects. Debit Butterfly (classic form): you pay a premium, profit when stagnating around the middle strike. Credit Butterfly (reverse order): you receive a premium, a different profit profile (less common variant). Limited risk and profit. Butterfly can be created as a Call and Put version. There are variations such as Broken Wing Butterfly (asymmetric) and Iron Butterfly (combination with straddle). The strategy can be built as targeted (OTM) or neutral (ATM).
Optimal conditions
Calm market, low volatility, expected stagnation of the underlying price. Also targeted speculation on movement to a certain point (in the case of OTM construction). Credit option for a specific scenario.
Max profit
U Debit version: strike difference (inside and outside) minus premium paid. U Credit version: premium received at entry.
Max loss
In Debit version: premium paid (limited, known). In Credit version: strike difference minus premium received (limited, known).
Risks
Limited loss. Risk of a large movement outside the strike range or an increase in volatility (which increases the price of options). Risk of poor strike selection or inappropriate timing.
Greeks
Delta neutral (at opening), Theta positive (time decay helps), Vega negative (increased volatility harms). Credit option may have a different Greek profile.
Variations
Iron Butterfly (listed straddle + protective option), Broken Wing Butterfly (asymmetric – risk shift), Call/Put Butterfly, Debit/Credit version, ATM, OTM, ITM.
Usage example
Call Butterfly on SPY: buy call 390, sell 2x call 400, buy call 410. Expiry in 30 days. Entry at premium e.g. -$200. Profit if SPY expires near 400.
DTE
Typically 20–40 days to expiration. Short-term versions (7–14 days) can also be used for rapid time decay (e.g. weekly options).
IV (implied volatility)
Low IV ideal for entry with Debit version. Credit version can be used with higher IV.
Premium
Debit version: you pay the premium. Credit version: you receive the premium.
Margin
Limited by strike difference (wider strike spread = higher margin). Debit lower margin (you pay premium), credit margin covered by strike difference.
Notes
Great strategy for advanced users. Can also be used as a cheap speculation on a specific target price (OTM Butterfly). Correct strike choice required. Credit version specific, less common.
Tags
butterfly, butterfly spread, debit butterfly, credit butterfly, option strategy, spread, limited risk, limited profit, stagnation, OTM, ITM, ATM
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