Butterfly
Three strikes: a bet that price ends pinned at the middle one. It costs little and hits rarely, but pays a lot when it does.
In the chapter
Combining contracts to choose your risk
From the same chapter
- Vertical spreadBuying and selling the same contract type at different strikes and the same expiry. It caps the maximum gain in exchange for bounding the loss.
- Debit spreadThe vertical you pay for on opening. You need the underlying to move your way: time works against you.
- Credit spreadThe vertical you get paid for on opening. You win if NOTHING happens and time works for you — but you lose more than you took in if you are wrong.
- Long straddleA call and a put at the same strike. It wins on a big move in either direction; it loses if the market sits still.
- Long strangleLike the straddle but with separated strikes: cheaper to open and needing a bigger move to pay.
- Iron condorOne credit spread above and another below. You get paid for betting price stays in a range, with the loss bounded on both sides.
- Calendar spreadSame strike, different expirations. Sell the near one and buy the far one: a bet on time passing, not on direction.
- Covered callSelling a call while owning the shares. You take in premium and give up the upside above the strike.