What it means
A butterfly spread combines four options at three strikes: long 1 contract at lower strike + short 2 contracts at middle strike + long 1 contract at higher strike, all same expiration and type (calls or puts). Payoff at expiration: maximum profit when underlying closes EXACTLY at the middle strike; zero profit or small loss at the wings. Limited risk (max loss = initial debit), limited reward (max profit = width of wings minus debit). Used for direction-neutral bets on time decay around a specific price level.
Why it matters
Butterflies are a low-cost way to bet on price PINNING — useful around major OPEX strikes where dealer charm and gamma create pin tendencies. Cheaper than straddles but require price to land precisely at the middle strike. Common variant: 'broken-wing butterfly' has unequal wings, biasing directionally.
How to use it
Identify potential pin strikes (major OI concentrations, round numbers, prior swing levels). Construct butterfly with middle strike at the pin. Profit if price closes within ±50% of wing width from middle at expiration. Best executed 2-5 days before major OPEX when charm-driven pinning is strongest.
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