Butterfly Spread

A butterfly is an appropriately-named option strategy because it sounds like it should have wings.  It does.  And the wings go in either direction away from the body.  You can see the resemblance when you look at the profit curve on the facing page.

The trade is put on by selling two call options (the body) which are sandwiched between two long call options -- one to the left and one to the right.  The wings are created by buying the calls, the body by selling the calls.  All told, there are three legs to the trade, each with a different strike price.  Normally, the intervals between each of the three strikes should be the same -- normally 1, 2 1/2, 5 or 10 point
intervals.

When using this strategy, the trader is predicting the underlying stock will trade close to the body's strike price the day that all the options expire.

There is a narrow range in which this strategy is profitable. Ideally, on the day of expiration, the stock will be selling

at the body's strike price.  This will result in the largest possible gain on the strategy. 

You can put on a butterfly trade with either all puts or all calls.  And true to the strategy's reputation as an "exotic trade", there are many variations to the basic butterfly.

You will likely want to close out your butterfly position before it expires.  If the two options your sold at the body expire worthless, at least sell the deep-in-the-money call option (left wing).