Butterflies Condors and Wingspreads
A butterfly is a three-leg strategy using either puts or calls consisting of one long contract with a lower strike, two short contract with a middle strike and one long contract of a higher strike. A butterfly is either all calls or all puts. The objective of the butterfly is to reap a high premium from the contracts at the middle strike while protecting against loss due to a major price swing by buying the outer contracts. The middle contracts are usually close to the money, while a good butterfly reaps high premium from the middle strike while buying the outer strikes cheaply.
Butterflies can be expensive, since three positions must be entered. The cost of a long butterfly is the cost of the outer legs minus the proceeds from the inner leg. The return on a butterfly peaks when the price of the underlying is equal to the middle strike price. Hence, purchasing a butterfly is neither bearish or bullish, the position will profit in a flat market. A good butterfly has a greater potential for profit than loss. The return bottoms out whenever the underlying price moves beyond the out strikes.
The butterfly has a similar P&L to a short straddle, with insurance against large moves in the underlying. The cost of the insurance will reduce the potential profit.