The long butterfly option strategy is a market neutral strategy where the trader expects the price of the underlying to trade around a certain price. The strategy can be constructed from either calls or puts, however, for the purpose of this example I will explain using call options.
A long put butterfly spread is a combination of a short put spread and a long put spread, with the spreads converging at strike B.
Because you’re selling two options with strike B, butterflies are a relatively low-cost strategy. Constructing your butterfly spread with strike B slightly in-the-money or slightly out-of-the-money may make it a bit less expensive to run.
Some investors may wish to run this strategy using index options rather than options on individual stocks.
Typically, investors will use butterfly spreads when anticipating minimal movement on the stock within a specific time frame. After the strategy is established, the effect of implied volatility depends on where the stock is relative to your strike prices.

Use the Profit + Loss Calculator to establish break-even points, evaluate how your strategy might change as expiration approaches, and analyze the Option Greeks. Multiple leg options strategies involve additional risks, and may result in complex tax treatments.
Ideally, you want all options except the put with strike C to expire worthless with the stock precisely at strike B.
An increase in volatility will increase the value of the option you own at the near-the-money strike, while having less effect on the short options at strike B, thereby increasing the overall value of the butterfly. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options.
However, this strategy is less risky since there is a limit to how much can be lost.Similarly, the short butterfly options trading strategy is a market neutral options strategy where the trader expects the price of the underlying to move but is indifferent about the direction. A decrease in implied volatility will cause those near-the-money options to decrease in value, thereby increasing the overall value of the butterfly. Options investors may lose the entire amount of their investment in a relatively short period of time.

Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. New accounts receive $1,000 in commission credit for equity, ETF and option trades executed within 60 days of funding the new account. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. Therefore the net loss from entering the position is -$10.Fast forward to the July, 2012, when the option expires.
Therefore the net gain from entering the position is $10.Fast forward to the July, 2012, when the option expires.
Commission credit covers equity, ETF and option orders including the per contract commission.

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