To sum it up in a simple sentence: the butterfly strategy is a bullish spread and a bear spread. A butterfly option consists of three options of the same type, with the same expiration time, and the same exercise between contracts.
The same type of option can form a butterfly spread, but a butterfly option is only composed of a series of call options or put options, and cannot exist at the same time, whether it is a call option or a put option.
That is to say, there are four ways to make up the butterfly spread, namely: long butterfly options (long position of call option and long position of put option); Short positions in butterfly options (long positions made up of call options and short positions made up of put options).
The criterion for investors to judge long and short positions is to see whether they are going out or collecting money when opening a position.
In a long butterfly option, one option each for the low price and one option (call or put), and two options for the middle (call or put) are sold, but all four options must be of the same type. Whereas, the trading operation of a short butterfly option is the opposite of that of a long position.
The butterfly trading strategy allows traders to profit from the expectation of lower volatility on a currency pair. This strategy can be implemented if there is low volatility in the market and when the trader believes that the currency pair** will not fluctuate much over a set period of time.
The maximum potential profit is limited to the option premium received. The maximum potential loss is limited to the difference between B and A minus the option premium received. In a butterfly trading strategy, time decay is in the trader's favor. The dealer wants all options to be worthless at the time of termination.
This anticipation allows traders to create butterfly trading strategies and profit from the very low volatility of currency pairs. By increasing the exercise of calls and puts with no intrinsic value**, the trader can increase his potential profits, but at the same time he also increases his potential losses.