In this strategy workshop, Liz and Jenny explain the basics of a Long Butterfly strategy. A Butterfly Spread is a spread where you Purchase 1 Strike In The Money, Sell 2 Options(at the same strike) Out of The Money, and Buy a further Strike OTM.
You'll start by looking for a very liquid underlying that has high implied volatility rank (IV rank), because butterflies trade cheaper in high implied volatility. Generally, we consider anything with an implied volatility rank of over 50% to be high.
Whether you choose the Call side or Put side will determine your assumption. Put Butterfly spreads are Bearish, whereas Call Butterfly Spreads are bullish.
When we trade Butterfly spreads, we hope that the price of the underlying will pin at our short strike, and that we can sell the Butterfly to close for a price larger than the debit paid.