Butterfly Spread
Three-strike neutral structure with maximum profit at the middle strike
What is Butterfly Spread?
Butterfly Spread A butterfly spread is a three-strike, four-leg neutral options strategy that profits when the underlying closes at or near the middle strike at expiration. The standard long butterfly is constructed with: buy 1 lower strike, sell 2 middle strikes, buy 1 upper strike (all same option type — call or put, all same expiration). The 1-2-1 ratio creates a defined-risk position with pin-strike profit potential. Structure (call butterfly): - Buy 1 call at lower strike (K1) - Sell 2 calls at middle strike (K2) - Buy 1 call at upper strike (K3) - Equal wing widths: K2 − K1 = K3 − K2 - Net debit (small) Worked example: SPY at $540, 30 DTE call butterfly - Buy 1 SPY $535C at $7.20 - Sell 2 SPY $540C at $4.50 each ($9.00 total credit) - Buy 1 SPY $545C at $2.40 - Net debit: $0.60 ($60 per contract) - Max profit: $4.40 ($440) — only if SPY closes exactly at $540 at expiration - Max loss: $60 (debit) if SPY closes below $535 or above $545 - Reward-to-risk: 7.3× — exceptional asymmetric payoff - Probability of profit: ~30% The butterfly's payoff diagram is a literal spike — a thin profit zone centered on the middle strike, with sharp slopes on either side. The strategy is the canonical "pin trade" — bet that the underlying will close exactly at a specific price. Variants: - **Long butterfly** (most common): pin to middle strike, defined risk equal to debit paid - **Short butterfly**: inverse — sell the body, buy the wings. Small credit at entry, max loss at the middle strike - **Iron butterfly**: combines call and put butterflies — see iron-butterfly term - **Broken-wing butterfly**: asymmetric wings (wider on one side) to bias the trade - **Skip-strike butterfly**: skip a strike between body and wings for cheaper entry When butterflies work: - **High-conviction pin theses**: stock anchored to a strike by dealer gamma or max-pain dynamics - **OPEX week**: triple witching and monthly expirations create concentrated pin pressure - **Post-vol-spike**: butterflies are cheap after IV expansion, profitable on subsequent IV crush + pin - **Pre-known event with expected pin**: e.g., earnings where the expected move closely matches the long-wing distance When butterflies fail: - **Strong directional moves**: blowing past the long wings forfeits the entire debit - **News-driven gaps**: overnight news can move the underlying far from the pin zone - **Range-bound but wrong center**: even modest moves away from the middle strike erode profit fast Butterflies are popular among pin traders and event-driven strategies. The asymmetric 5-10× reward-to-risk means winners can cover multiple losers, but the probability of profit is low. Position sizing matters — the strategy is structurally lottery-like, with rare large wins and frequent small losses.
Complete Definition
A butterfly spread is a three-strike, four-leg neutral options strategy that profits when the underlying closes at or near the middle strike at expiration. The standard long butterfly is constructed with: buy 1 lower strike, sell 2 middle strikes, buy 1 upper strike (all same option type — call or put, all same expiration). The 1-2-1 ratio creates a defined-risk position with pin-strike profit potential. Structure (call butterfly): - Buy 1 call at lower strike (K1) - Sell 2 calls at middle strike (K2) - Buy 1 call at upper strike (K3) - Equal wing widths: K2 − K1 = K3 − K2 - Net debit (small) Worked example: SPY at $540, 30 DTE call butterfly - Buy 1 SPY $535C at $7.20 - Sell 2 SPY $540C at $4.50 each ($9.00 total credit) - Buy 1 SPY $545C at $2.40 - Net debit: $0.60 ($60 per contract) - Max profit: $4.40 ($440) — only if SPY closes exactly at $540 at expiration - Max loss: $60 (debit) if SPY closes below $535 or above $545 - Reward-to-risk: 7.3× — exceptional asymmetric payoff - Probability of profit: ~30% The butterfly's payoff diagram is a literal spike — a thin profit zone centered on the middle strike, with sharp slopes on either side. The strategy is the canonical "pin trade" — bet that the underlying will close exactly at a specific price. Variants: - **Long butterfly** (most common): pin to middle strike, defined risk equal to debit paid - **Short butterfly**: inverse — sell the body, buy the wings. Small credit at entry, max loss at the middle strike - **Iron butterfly**: combines call and put butterflies — see iron-butterfly term - **Broken-wing butterfly**: asymmetric wings (wider on one side) to bias the trade - **Skip-strike butterfly**: skip a strike between body and wings for cheaper entry When butterflies work: - **High-conviction pin theses**: stock anchored to a strike by dealer gamma or max-pain dynamics - **OPEX week**: triple witching and monthly expirations create concentrated pin pressure - **Post-vol-spike**: butterflies are cheap after IV expansion, profitable on subsequent IV crush + pin - **Pre-known event with expected pin**: e.g., earnings where the expected move closely matches the long-wing distance When butterflies fail: - **Strong directional moves**: blowing past the long wings forfeits the entire debit - **News-driven gaps**: overnight news can move the underlying far from the pin zone - **Range-bound but wrong center**: even modest moves away from the middle strike erode profit fast Butterflies are popular among pin traders and event-driven strategies. The asymmetric 5-10× reward-to-risk means winners can cover multiple losers, but the probability of profit is low. Position sizing matters — the strategy is structurally lottery-like, with rare large wins and frequent small losses.
Example
TSLA at $250 pre-earnings. Long $240/$250/$260 call butterfly for $1.80 debit. After earnings, TSLA pins at $252. Long $240C worth $12.50, short $250Cs worth $2.30 each, long $260C worth $0.30. Net: $12.50 - $4.60 + $0.30 = $8.20 per spread. Profit: +$640 per contract on $180 debit (356% return).
Formula
Related Terms
Frequently Asked Questions
What is a butterfly spread?
A butterfly spread is a three-strike neutral options strategy: buy 1 lower strike, sell 2 middle strikes, buy 1 upper strike (all same option type and expiration). Profits maximum when the underlying closes at the middle strike at expiration — a defined-risk pin trade with asymmetric 5-10× reward-to-risk.
What's the maximum profit on a butterfly spread?
Wing width minus the debit paid, realized only when the underlying closes at the middle strike at expiration. For a $10-wide butterfly costing $1.80 debit, max profit is $8.20 ($820 per contract). Outside the wings, max loss is the debit paid.
When should I use a butterfly spread?
On high-conviction pin theses — when you expect the underlying to close at a specific price. OPEX weeks with concentrated open interest, post-vol-spike pin trades, or pre-event setups where the implied move matches the wing distance. The strategy is structurally lottery-like with frequent small losses and rare large wins.
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