A butterfly spread is a neutral options strategy constructed using three strike prices at equal intervals, combining a bull spread and a bear spread on the same underlying asset and expiry. A long butterfly involves buying one option at a lower strike, selling two options at the middle strike, and buying one option at the higher strike. The maximum profit occurs when the underlying settles exactly at the middle strike at expiry, while the maximum loss is limited to the net premium paid. Butterfly spreads on Nifty 50 weekly options are popular among Indian traders who expect the index to remain range-bound around a specific level. The strategy is particularly attractive when implied volatility is high — meaning options are expensive — since the net premium cost is low relative to the potential payoff at the sweet spot.
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