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Butterfly Spread Meaning & Definition

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Definition of Butterfly Spread

A butterfly spread is the simultaneous establishment of both a bull spread and a bear spread on the same underlying security. An investor who establishes a butterfly spread is effectively neutral on the underlying security. A butterfly spread has three option positions, the center strike price and two outer strike prices or ÒwingsÓ (hence the name butterfly spread). The position at the center strike price contains twice the number of contracts as the two outer option positions

Applying "Butterfly Spread" to Securities Exams:

A butterfly spread, like a straddle, will have two breakeven points, one above the center strike price and one below. The breakeven point for the upper end of the position will be the higher strike price Ð the debit. The breakeven point for the lower end of the position will be the lower strike price + the debit. A butterfly spread could be established as follows:

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