Glossary A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z | 1 | 3 | 4 | 5 Definitions by InvestorWords.com   What is...? Butterfly A butterfly spread is a three–legged options strategy made up of all calls or all puts with three different strike prices. It carries a 1:2:1 ratio—e.g. if the first leg has 10 contracts, the second and third legs must have 20 and 10 contracts respectively. The options in a butterfly spread must all be on the same underlying asset and the strikes must be equidistant. This strategy has limited up and downside. There are two types of butterflies: Long Butterfly — Established by purchasing a call/put at a lower strike price, selling two calls/puts at a middle strike, and buying a call/put at a higher strike. Generally used by traders who feel the underlying will move in a narrow range. Results in a net debit to the buyer. Short Butterfly — Established by selling a call/put at a lower strike price, buying two calls/puts at a middle strike, and selling a call/put at a higher strike. Generally used by traders who feel the underlying will move significantly. Results in a net credit to the seller. Copyright ©2009 by InvestorGuide.com. All Rights Reserved.