The Butterfly Spread is a neutral strategy that is a combination of a Bull Spread and a Bear Spread. It is a limited profit, limited risk options strategy. There are 3 striking prices involved in a Butterfly Spread and it can be constructed using calls or puts.
Buy 1 call at the lowest strike price; Sell 2 calls at the middle strike price; Buy 1 call at the highest strike price. Use the same expiration date.
Long Call Butterfly
Long Butterfly Spreads are entered when the investor thinks that the underlying stock will not rise or fall much by expiration. Using calls, the long butterfly can be constructed by buying one lower striking in-the-money call, writing two at-the-money calls and buying another higher striking out-of-the-money call. A resulting net debit is taken to enter the trade.
Limited Profit
Maximum profit for the Long Butterfly Spread is attained when the underlying stock price remains unchanged at expiration. At this price, only the lower striking call expires in the money.
Middle strike price minus lowest strike price minus net opening cost.
Limited Risk
Maximum loss for the Long Butterfly Spread is limited to the initial debit taken to enter the trade plus commissions.
Calculate these amounts and use the largest: Net opening cost; Lowest strike price plus highest strike price plus net opening cost minus twice the middle strike price.
Breakeven Point(s)
There are 2 break-even points for the Butterfly Spread position. The breakeven points can be calculated using the following formulae.
The breakeven can change depending on which strikes the stock finishes between.
Calculate the breakeven prices
- Prices at or below the lowest strike price all break even only when the net opening cost equals zero.
- Net opening cost plus lowest strike price. Use this result only if it is between the lowest strike price and the middle strike price.
- Twice the middle strike price minus net opening cost minus lowest strike price. Use this result only if it is between the middle strike price and the highest strike price.
- Prices at or above the highest strike price all break even only when the net opening cost equals twice the middle strike price minus lowest strike price minus highest strike price.
Ignore results below zero. A boundary price listed twice is a single breakeven.
Example
Suppose XYZ stock is trading at $40 in June. An options trader executes a Long Call Butterfly by purchasing a JUL 30 call for $1100, writing two JUL 40 calls for $400 each and purchasing another JUL 50 call for $100. The net debit taken to enter the position is $400, which is also his maximum possible loss.
On expiration in July, XYZ stock is still trading at $40. The JUL 40 calls and the JUL 50 call expire worthless while the JUL 30 call still has an intrinsic value of $1000. Subtracting the initial debit of $400, the resulting profit is $600, which is also the maximum profit attainable.
Maximum loss results when the stock is trading below $30 or above $50. At $30, all the options expire worthless. Above $50, any "profit" from the two long calls will be neutralised by the "loss" from the two short calls. In both situations, the butterfly trader suffers maximum loss which is the initial debit taken to enter the trade.
These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.
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Commissions
Commission charges can make a significant impact to overall profit or loss when implementing option spreads strategies. Their effect is even more pronounced for the Butterfly Spread as there are 4 legs involved in this trade compared to simpler strategies like the vertical spreads which have only 2 legs.
For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.
Similar Strategies
The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.
Short Butterfly
The converse strategy to the long butterfly is the Short Butterfly. Short Butterfly spreads are used when high volatility is expected to push the stock price in either direction.
Long Put Butterfly
The long butterfly trading strategy can also be created using puts instead of calls and is known as a Long Put Butterfly.
Wingspreads
The Butterfly Spread belongs to a family of spreads called wingspreads whose members are named after a myriad of flying creatures.
Before expiration and assignment
The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.
Net opening cost means everything paid to open the position, less everything received. Include the shares as well as the options. If opening the position brings in money overall, treat that cost as a negative amount.
Amounts are per share before fees. Multiply by the shares covered by the position; standard equity options usually cover 100 shares per contract. If a maximum profit or loss calculation gives a negative amount, use zero. These figures assume matching contracts held to expiration and do not include financing or early assignment.
Compare This Strategy
Optional further reading to help you compare the tradeoffs.
- Butterfly Spread vs Iron Butterfly — With matched strikes, compare executable net prices, fees and the assignment treatment of each construction.
- Butterfly vs Broken Wing vs Broken Heart Butterfly — First decide where the stock is expected to finish.
- Butterfly vs Christmas Tree Spread — Compare the width of the profitable region as well as the maximum gain.
Advanced Strategy Variations
Build on the core strategies with these less common structures. Match the option legs and expirations when comparing names.
