Definition of Butterfly Spread
Applies to derivative products. Complex option strategy that involves buying a calloption with a relatively low strike price; buying a call option with arelatively high strike price; and selling two call options with an intermediate strikeprice. Essentially, this is a bear call spread stacked on top of a bull call spread. One can also do this with puts. The investor buys a put with a low strike, buys a put at high strike and sells twoputs at intermediate strike price.The payoff diagram resembles the shape of a butterfly.