It is a low risk, low payoff options strategy, designed to take advantage of a market or security that is range-bound. When expectations have it that the future volatility of the underlying security would be different from the implied volatility, a low-risk options strategy can be crafted with the aim of making a limited profit at a high probability level. A butterfly can be constructed using either call or put options. The strategy is called butterfly due to the shape of its payoff graph.

To create a butterfly, an investor should buy one in the money call, sell (or short) two at the money calls, and buy one out of the money call. The three options should maintain a ratio of 1:2:1. Moreover, the exercise prices of the two long positions should be the same distance from the exercise price of the two short calls (for example, 80, 85, and 90).