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In finance, a butterfly (or simply fly) is a limited risk, non-directional options strategy that is designed to have a high probability of earning a limited profit when the future volatility of the underlying asset is expected to be lower (when long the butterfly) or higher (when short the butterfly) than that asset's current implied volatility.
Options spreads are the basic building blocks of many options trading strategies. [6] A spread position is entered by buying and selling options of the same class on the same underlying security but with different strike prices or expiration dates. An option spread shouldn't be confused with a spread option.
Nor does the seller hold any option of the same class on the same underlying asset that could protect against potential losses (like in an options spread). A naked option involving a " call " is called a "naked call" or "uncovered call", while one involving a " put " is a "naked put" or "uncovered put".
A short iron butterfly option strategy will attain maximum profit when the price of the underlying asset at expiration is equal to the strike price at which the call and put options are sold. The trader will then receive the net credit of entering the trade when the options all expire worthless.
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As above, these methods can solve derivative pricing problems that have, in general, the same level of complexity as those problems solved by tree approaches, [1] but, given their relative complexity, are usually employed only when other approaches are inappropriate; an example here, being changing interest rates and / or time linked dividend policy.
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Butterfly, on the other hand, is a strategy consisting of: −y% delta fly which mean Long y% delta call, Long y% delta put, short one ATM call and short one ATM put (small hat shape). Implied volatility and historical volatility
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