Butterfly Spread: Low-Cost, Defined-Risk Neutral Strategy
A butterfly spread is a cheap, defined-risk way to bet the underlying pins near a strike. Here's how to build it, with max profit, loss and break-evens.
Short answer: A long butterfly spread is a three-strike, defined-risk neutral strategy: buy one lower-strike option, sell two middle-strike options, and buy one higher-strike option (equally spaced, same expiry). It costs a small net debit and pays the most if the underlying pins at the middle strike at expiry.
How to build it (long call butterfly)
- Buy 1 call at the lower strike.
- Sell 2 calls at the middle strike (ATM).
- Buy 1 call at the higher strike.
- Strikes equally spaced, same expiry → small net debit. (A put butterfly is the mirror.)
The numbers
| Metric | Formula |
|---|---|
| Net cost | Debit paid (small) |
| Max profit | (Wing width) − Net debit — at the middle strike |
| Max loss | Net debit |
| Break-evens | Lower strike + debit, and Higher strike − debit |
When to use it
A butterfly suits a strong neutral view — you expect the underlying to settle near a specific level by expiry, with low volatility. It's cheap and risk is tiny (the debit), but the profit zone is narrow and you need price to pin.
Butterfly vs iron fly
A butterfly is built from one option type (all calls or all puts); an iron fly uses both and is typically a credit. Both are pin-the-middle neutral plays with defined risk.
FAQ
Why is a butterfly so cheap? The two short middle options finance most of the two long wings, so the net debit is small — which is also your max loss.
What kills a butterfly? A move away from the middle strike, or high volatility keeping price from pinning. Best deployed close to expiry in calm markets.
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