Butterfly Spread
A butterfly spread combines three strikes: buy one lower-strike option, sell two middle-strike options, and buy one higher-strike option, all with the same expiry. It costs little, risks only the premium and pays most if price ends exactly at the middle strike.
A butterfly spread is a precise bet: you expect a stock to finish near one particular price on a particular date. In exchange for that precision, it is cheap and its risk is limited to what you pay. Traders use it around targets, pinning levels or calm periods. This entry explains how the three-strike structure works and walks through the payoff.
- Category
- Derivatives
- Reading time
- 4 min
- Also called
- Long call butterfly, Long put butterfly, Options butterfly
- Updated
Butterfly spreads in plain words
A long call butterfly sells two calls at a middle strike and buys one call each at a lower and a higher strike.1
The outer strikes, the wings, must be the same distance from the middle strike, the body, and all options share one expiry.1
The best result comes if the stock sits at the middle strike at expiry; the worst if it ends outside the wings.1
How to build a butterfly, step by step
Pick a target price
Where you expect the stock to finish.
Sell two at the target
The body of the butterfly.
Buy one below
The lower wing.
Buy one above
The upper wing, the same distance away.
Pay a small debit
Usually the trade costs money to open. See Option Premium.
Manage near expiry
Most of the value appears in the final days. See Option Greeks.
Worked examples
Example 1 — Perfect landing
+$400Buy one $55 call, sell two $60 calls, buy one $65 call. Net debit $1.00. At expiry the stock is exactly $60.
| $55 call value | ($60 − $55) × 100 = $500 |
| Other calls | Expire worthless |
| Profit (maximum) | $500 − $100 = $400 |
Maximum gain is the high strike minus the middle strike minus the net premium, reached at the middle strike.1
Example 2 — Outside the wings
−$100Same butterfly, the stock ends at $70.
| Long $55 call | +$1,500 |
| Two short $60 calls | −$2,000 |
| Long $65 call | +$500 |
| Net after debit | $0 − $100 = −$100 |
The maximum loss is the net premium paid, reached when the stock ends outside the wings.1
Example 3 — Break-evens
Profit zone $56–$64Same butterfly, net debit $1.00.
| Lower break-even | $55 + $1 = $56 |
| Upper break-even | $65 − $1 = $64 |
| Reward-to-risk | $400 : $100 = 4 : 1 |
The payoff is high relative to the cost, but the profit zone is narrow. See Risk-to-Reward Ratio.
Butterfly vs iron condor
| Aspect | Butterfly | Iron condor |
|---|---|---|
| Strikes | Three | Four |
| Entry | Usually a debit | A credit |
| Profit zone | Narrow, peaked | Wide, flat |
| Reward-to-risk | High | Low. See Iron Condor |
When traders use butterflies
Price targets
Betting on a specific level at expiry.
Low-volatility periods
When large moves seem unlikely. See Volatility.
Cheap speculation
Small cost for a large potential payoff.
Earnings aftermath
Expecting calm after an event.
Advantages and disadvantages
Advantages
- Low cost to enter.
- Maximum loss is the premium paid.
- High reward relative to risk.
Disadvantages
- Narrow profit zone.
- Most value appears only near expiry.
- Four contracts mean more trading costs.
Going deeper
Read as far as you need. Each level builds on the one before it.
Calls or puts
Beginner
With the same strikes and expiry, a long call butterfly and a long put butterfly have the same payoff at expiration.1
Time decay
Intermediate
Time decay usually helps a butterfly whose body is at the money and hurts one whose body is away from the money.1 See Option Greeks.
Assignment on the body
Advanced
The two short options in the middle can be assigned, which obliges you to deliver or buy shares at that strike.2 See Exercise and Assignment.
Common mistakes
Expecting the maximum
Landing exactly on the body is rare.
Uneven wings
A standard butterfly needs equal distances.
Holding through big moves
Loss is limited but the trade is dead.
Ignoring costs
Four legs add up in commissions and spreads.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A butterfly uses three strikes: buy one, sell two, buy one.
- The wings are equidistant from the body.
- Max gain comes at the middle strike.
- Max loss is the premium paid.
- Cheap, but the profit zone is narrow.
Frequently asked questions
Why is it called a butterfly?
Is a butterfly bullish or bearish?
What is an iron butterfly?
Further learning
- Vertical Spread
A butterfly is two verticals.
- Iron Condor
A wider range strategy.
- Option Greeks
Why time decay matters here.
- Straddle and Strangle
The opposite volatility bet.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Options Industry Council (OCC). Long Call Butterfly (opens in a new tab) Checked .
- FINRA. Options (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.