Hedge Fund Glossary

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Butterfly

a limited risk, non-directional Options strategy that is designed to have a large probability of earning a small limited profit when the future volatility of the underlying is expected to be different from the implied volatility. Butterfly spreads use four Option contracts with the same expiration but three different Strike Prices to create a range of prices the strategy can profit from. The payoff diagram resembles the shape of a butterfly.

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