Butterfly spread
A butterfly spread is an strategy built from three on the same underlying and the same , designed to profit when the stays close to a target price rather than making a large move in either direction. It combines a long option, two short at a middle strike, and another long option further away, all in the same ratio, so the position looks like a tent shape when its profit and loss is plotted against the price at expiration.
The trade is typically built using either all calls or all puts. A trader buys one option at a lower strike, sells two at a middle strike, and buys one more option at a higher strike, with the middle strike usually set at or near where the trader expects the to land. Because the premium collected from selling the two middle largely offsets the cost of the two bought around it, the maximum amount that can be lost is limited to a small net premium paid up front, while the maximum gain is capped at the difference between adjacent strikes, achieved only if the finishes exactly at the middle strike at expiration.
Butterfly spreads appeal to traders who expect a to trade in a narrow range, for example heading into an event where a big move seems unlikely, since the strategy benefits from low realized and working in the position's favor near the target price. The tradeoff is a payoff that only reaches its full potential in a fairly narrow band of outcomes, and the position loses most or all of its value if the finishes well above or below the strikes used to build it.