What Is a Butterfly Spread? Options Butterfly Strategies Explained

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A butterfly spread is an options strategy that combines four contracts at three equally spaced strike prices, all on the same underlying asset and with the same expiration. The classic long version buys one lower-strike option, sells two middle-strike options and buys one higher-strike option. The result is a position with a known maximum gain and a known maximum loss. It earns the most when the underlying finishes exactly at the middle strike, and its value falls off on both sides of that strike.

The name comes from the payoff diagram. The two short options at the center form the “body,” and the long options on either side form the “wings.” The distance between the middle strike and each outer strike is the wing width.

How a butterfly spread works

A long butterfly is two vertical spreads that share a middle strike. In a long call butterfly, the lower half is a bull call spread (buy the low strike, sell the middle) and the upper half is a bear call spread (sell the middle, buy the high strike). The bull spread gains as the price rises toward the middle strike. The bear spread loses as the price rises past it. Together they produce a tent-shaped payoff that peaks at the middle strike.

A standard setup looks like this:

1. Buy one lower-strike option. For a call butterfly this call is usually in the money.
2. Sell two middle-strike options. These are usually at the money, close to the current price.
3. Buy one higher-strike option. For a call butterfly this call is usually out of the money.

The two long wings cap the risk of the two short options. That is why a butterfly has defined risk even though it contains short options.

Put butterflies use the same strike pattern with puts. At expiration a call butterfly and a put butterfly with the same strikes produce the same payoff. Before expiration their prices can differ slightly because of dividends, interest rates and the bid-ask spreads on each leg. Traders often pick whichever version offers better fills or less early-assignment exposure.

Butterfly spread formula

For a long call or long put butterfly with equal wing width W, where L, M and H are the lower, middle and higher strikes:

• Net debit (D) = premium of the lower option + premium of the higher option − (2 × premium of the middle option)
• Maximum loss = D, reached at or beyond either outer strike at expiration
• Maximum profit = W − D, reached when the underlying closes exactly at M
• Lower breakeven = L + D
• Upper breakeven = H − D

For a short butterfly the signs flip. The net credit (C) is the maximum profit. The maximum loss is W − C, and the breakevens are L + C and H − C. All figures are per share. Standard US equity options usually cover 100 shares, so you multiply by 100 per contract. Commissions and fees come on top.

Worked example: long call butterfly

In this hypothetical example, a stock trades at $100 and a trader expects it to stay near that level until expiration. The trader enters:

• Buy one 95 call at $7.00
• Sell two 100 calls at $4.00 each (+$8.00)
• Buy one 105 call at $2.00

Net debit = 7.00 + 2.00 − 8.00 = $1.00 per share, or $100 per contract set. The wing width is $5.

At $100 the 95 call is worth $5, and the two short 100 calls and the long 105 call all expire worthless. The trader risks $100 to make up to $400, but only if the stock closes right at $100. Outside the $96 to $104 zone the full $100 is lost.

These figures assume the position is held to expiration, all legs fill at the quoted prices, and there are no commissions, dividends or early assignment.

Types of butterfly spreads

Long call butterfly

Long one lower-strike call, short two middle-strike calls, long one higher-strike call, entered for a net debit, as in the example above.

Long put butterfly

Long one higher-strike put (in the money), short two middle-strike puts, long one lower-strike put (out of the money), entered for a net debit. The payoff matches the long call butterfly.

Short call butterfly

Short one lower-strike call, long two middle-strike calls, short one higher-strike call, entered for a net credit. This is a volatility trade. The trader keeps the credit if the underlying ends beyond either outer strike. The worst outcome is a close at the middle strike, where the loss equals the wing width minus the credit.

Short put butterfly

Short one higher-strike put, long two middle-strike puts, short one lower-strike put, entered for a net credit. Its risk and reward match the short call butterfly.

Iron butterfly

An iron butterfly mixes puts and calls. It sells an at-the-money put and an at-the-money call at the same strike, which is a short straddle. It then buys an out-of-the-money put below and an out-of-the-money call above, which is a long strangle that caps the risk. The trade opens for a net credit.

Using the same hypothetical stock: sell the 100 put at $3.50 and the 100 call at $4.00, buy the 95 put at $1.50 and the 105 call at $2.00. The net credit of $4.00 is the maximum profit, kept if the stock closes at $100. Maximum loss is the $5 wing width minus the credit, or $1.00, and the breakevens are $96 and $104. The shape matches the long call butterfly, but cash comes in up front rather than going out.

Reverse iron butterfly

The reverse (long) iron butterfly buys the at-the-money call and put and sells the out-of-the-money call and put. It is entered for a net debit and profits when the underlying moves past either breakeven, which sit at the middle strike plus and minus the debit. Maximum profit is the wing width minus the debit, reached at or beyond either outer strike. Maximum loss is the debit, reached at the middle strike. In effect it is a long straddle with the upside sold off on both ends to cut the cost.

Directional and broken wing butterflies

A butterfly does not have to be centered on the current price. A directional butterfly places the body above the current price for a bullish view, sometimes called a bull butterfly, or below it for a bearish view. The trader is targeting a specific price at expiration, not betting on no movement.

A broken wing butterfly uses unequal wing widths. For example, the upper wing might sit further from the body than the lower wing. It can sometimes be opened for a very small debit or even a credit. In exchange, risk on the wider side grows: the maximum loss there is the difference between the two wing widths, adjusted for the premium. The narrow side may carry little or no risk.

The Greeks on a butterfly

A butterfly’s sensitivity to market factors changes a lot depending on where the price sits relative to the strikes. For a long butterfly:

• Delta is close to zero near the middle strike. It turns positive below the body and negative above it.
• Gamma is negative near the body, so sharp moves away from the center hurt the position.
• Theta is positive near the body, and the effect speeds up near expiration. If the price drifts toward or past a wing, theta can turn negative.
• Vega is negative near the body. A rise in implied volatility usually lowers the value of a long butterfly, and a fall raises it.

A short butterfly carries the opposite exposures. For definitions of each measure, see option Greeks.

How traders use butterfly spreads

• Range-bound views at low cost. A long butterfly expresses “the price will stay near X” for a debit often much smaller than buying a single option, because the written options pay for much of the long ones.
• Price targeting. Shifting the body to a target level makes the butterfly a cheap bet on where the underlying will finish.
• Event and volatility views. Short butterflies and reverse iron butterflies are a defined-risk alternative to buying a straddle outright.
• Capital efficiency. Because the risk is capped, brokers generally require far less margin than for naked short options. The exact requirement depends on the broker and the account type.
• FX volatility quoting. In currency options, “butterfly” also names a volatility quote. It usually means the implied volatility of a delta-based strangle (such as 25-delta) compared with at-the-money volatility, and it measures how curved the volatility smile is. It is a pricing convention, not a four-leg trade.

Limitations of a butterfly spread

• Narrow sweet spot. The maximum gain needs the underlying to close at one exact price at expiration, so the full payoff is uncommon.
• Execution cost. Four legs mean four sets of commissions and four bid-ask spreads. On options with low open interest or wide markets, slippage can take up a large share of the possible profit. Entering the spread as a single combination order can reduce leg risk.
• Hard to adjust. Rolling or repairing a butterfly means unwinding several legs, which adds more cost.
• Slow early profit. A long butterfly gains most of its value close to expiration. Before then, even a perfectly placed position may show only a modest gain.
• Assignment and pin risk. With American-style options, the short legs can be assigned early, especially around dividends. At expiration, a close very near the middle strike can leave uncertainty over whether the short options will be exercised, which can create an unwanted stock position over the weekend.

Butterfly spread vs. similar strategies

Butterfly vs. straddle. A long straddle buys a call and a put at the same strike. It profits from large moves and has unlimited upside, but the full premium is at risk. A short straddle profits from stability but has unlimited risk. The wings of an iron butterfly cap that loss at the cost of some credit.

Butterfly vs. iron condor. An iron condor uses four strikes instead of three. It separates the short put and short call strikes to create a flat profit zone rather than a single peak. The condor’s maximum profit is usually lower than a comparable butterfly’s, but the range where it reaches that maximum is wider.

Butterfly vs. vertical spread. A vertical spread is one directional leg pair with two strikes. A butterfly combines two verticals that point in opposite directions, which removes most of the directional bias.

FAQs

The Bottom Line

Butterfly spreads suit options traders who expect an underlying to finish near a specific price and want defined risk at low cost. The full payoff requires a close at one exact strike, and four legs add commissions, bid-ask costs and assignment risk. Traders who use combination orders, liquid options and realistic targets give the strategy its best chance of working.