"butterfly effect"
Butterfly effect
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For other uses, see Butterfly effect (disambiguation).
Point attractors in 2D phase space.
The butterfly effect is a metaphor that encapsulates the concept of sensitive dependence on initial conditions in chaos theory; namely that small differences in the initial condition of a dynamical system may produce large variations in the long term behavior of the system. Although this may appear to be an esoteric and unusual behavior, it is exhibited by very simple systems: for example, a ball placed at the crest of a hill might roll into any of several valleys depending on slight differences in initial position. The butterfly effect is a common trope in fiction when presenting scenarios involving time travel and with "what if" scenarios where one storyline diverges at the moment of a seemingly minor event resulting in two significantly different outcomes.
Butterfly (options)
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Payoff chart from buying a butterfly spread.
Profit from a long butterfly spread position. The spread is created by buying a call with a relatively low strike (x1), buying a call with a relatively high strike (x3), and shorting two calls with a strike in between (x2).
In finance, a butterfly is 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.