Derivatives · Core
Butterfly Spread
A butterfly is long one wing, short two bodies, long the other wing — a bet on a pin or on the curvature of the smile.
Definition
Classic: +1× / −2× / +1× at equally spaced strikes. Long fly wants spot to pin the body; short fly wants a move or a fatter body. Flies also trade the butterfly of implied vol (convexity of the smile).
Why it matters
Expiry pinning and smile convexity are fly markets. It is a defined-risk way to sell or buy the middle.
Case
A 1-week ATM fly into a no-event week. If spot dies at the body, the long fly is the whole P&L. If it trends, the fly expires near zero.
How to read it
Is this a spot-pin trade or a vol-convexity trade? Same structure, different Greek leftover.
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