A butterfly is a spread of two vertical spreads. One vertical spread is bought and a second similar (same expiration date and type) vertical spread is sold, such that the two vertical spreads share one strike price.
For example:
- Buy one 110 strike call
- Sell two 105 strike calls
- Buy one 100 strike call
This is really a position that is long a 100/105 call spread and short a 105/110 call spread.
Butterfly spreads have both limited risk and limited reward.