Which trading strategy aims to profit from minimal price movement?

The butterfly spread is a trading strategy that is designed to profit from minimal price movement in the underlying asset. This strategy involves utilizing multiple options to create a position that benefits from the price of the underlying security remaining close to a specific target price at expiration.

In a typical butterfly spread, a trader will buy one option at a lower strike price, sell two options at a middle strike price, and then buy one more option at a higher strike price. All these options usually have the same expiration date. The result is a position with a limited risk and a limited profit potential. The maximum profit occurs when the underlying asset closes at the middle strike price at expiration, where the sold options expire in-the-money, allowing the trader to gain the premium received from selling those options.

This strategy reduces the overall cost due to the short positions, acting as a sort of hedge. It is particularly beneficial in low-volatility environments where the trader does not expect significant price moves. Thus, the butterfly spread is well-suited for scenarios where minimal price movement is anticipated, making it the correct choice in this context.