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Butterfly Spread

A low-cost, high-reward bet that the stock pins to a specific price at expiration.

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What is a Butterfly Spread?

A butterfly spread uses three strike prices: you buy one option at a lower strike, sell two options at a middle strike, and buy one option at an upper strike — all in the same expiration. The result is a position that achieves maximum profit if the stock closes exactly at the middle strike at expiration, with defined losses on either side. Butterflies are often described as "pinpoint bets" — they are cheap to enter (the cost is usually a small net debit), and they can return 5–10× or more if the stock settles near the middle strike. The risk is fully limited to the premium paid if the stock moves far from the middle strike in either direction. Long butterflies are used by traders who expect low volatility and a specific price target at expiration.

When to use it

Butterflies are best used when you have a very specific price target and believe the stock will have low volatility into expiration. A common application is around earnings when you expect a muted reaction — you center the butterfly on the current stock price and profit if the stock barely moves. They are also used to target technical levels: if you expect the stock to tag a specific resistance or support level and stall, a butterfly centered there captures that outcome efficiently. Butterflies cost very little, which makes them attractive for speculative precision trades. They are less effective in high-volatility environments because the probability of landing on the middle strike decreases with larger expected moves.

Structure

Buy 1 option at the lower strike, sell 2 options at the middle strike, and buy 1 option at the upper strike. For a standard call butterfly: buy 1 lower-strike call, sell 2 middle-strike calls, buy 1 upper-strike call. The strikes should be equidistant (e.g., $45/$50/$55). The trade is entered for a net debit — the two short calls partially fund the two long calls. Put butterflies have the same structure using puts.

Key Metrics

Max Profit
(Distance between adjacent strikes − net debit paid) × 100. This is achieved when the stock closes exactly at the middle strike at expiration. For example, a $45/$50/$55 butterfly purchased for $0.50 achieves maximum profit of ($5 − $0.50) × 100 = $450 per contract if the stock pins at $50. The nearer the stock is to the middle strike at expiration, the higher the profit, up to this maximum.
Max Loss
Net debit paid × 100. This is the entire cost of the position, lost in full if the stock closes at or below the lower strike or at or above the upper strike at expiration. The maximum loss is small relative to the potential profit — this asymmetric payoff (small risk, large potential reward) is why traders find butterflies attractive for speculative precision trades.
Breakeven
Two breakevens — one above and one below the middle strike. Lower breakeven: lower strike plus the net debit paid. Upper breakeven: upper strike minus the net debit paid. For example, a $45/$50/$55 butterfly for $0.50 has breakevens at $45.50 and $54.50. The stock must close between these two points for the trade to be profitable.
Greeks Profile
Theta is positive when the stock is near the middle strike — the short middle-strike options decay faster than the long wing options, benefiting the position over time as long as the stock stays near the center. Theta turns negative if the stock moves away from the middle strike. Delta is near zero when the butterfly is centered ATM and the stock is at the middle strike, but becomes directional if the stock moves away from center. Vega is negative when the stock is near the middle strike — lower implied volatility benefits a butterfly because you want precision, not explosive moves. Gamma is negative near the middle strike (the position loses value if the stock moves sharply in either direction).

Tips & Best Practices

  • 1Center the butterfly on your specific price target, not necessarily the current stock price — a "skip butterfly" placed off-center captures a directional move to your target.
  • 2Butterflies are cheap, which makes them tempting to over-trade — the average win rate is lower than it appears because precision timing is required.
  • 3Close the butterfly at 50–80% of maximum profit if the stock approaches your middle strike before expiration — do not wait for pinpoint expiration to capture the maximum.
  • 4Broken-wing butterflies (unequal strike spacing) can be structured for a credit, eliminating the debit — this shifts the P&L but also changes where the profitable zone is.
  • 5Narrow butterflies (1-point wings) are very cheap but extremely difficult to profit from — the stock must pin to within a dollar. Wider wings cost more but have a larger profit zone.
  • 6Use put butterflies for downside targets and call butterflies for upside targets — technically equivalent in payoff but can have slight pricing advantages due to skew.
  • 7Butterflies into earnings can exploit a "muted reaction" thesis — center on the current price and profit if the stock stays near where it started.
  • 8Unlike a short straddle or iron condor, a butterfly requires no margin — the maximum loss is already paid upfront, making it suitable for accounts without spread-trading approval.

See it in action

Model a Butterfly Spread with a real ticker. See the P&L chart, heatmap, and exact breakevens.

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