Long Butterfly Spread Explained
A long butterfly buys one call, sells two higher-strike calls, and buys one further call: a cheap, defined-risk bet that the underlying finishes near the middle strike.
What it is
A long call butterfly combines a bull call spread and a bear call spread that share the middle strike: you buy one lower-strike call, sell two middle-strike calls, and buy one higher-strike call, all in the same expiration. It costs a small net debit and pays off best if the underlying finishes right at the middle strike, where the sold calls expire worthless and the lowest call is deep in-the-money. It is a low-cost, defined-risk way to bet that a stock pins a specific level, with a payoff that looks like a tent peaked at the middle strike.
Payoff at expiration
When to use it
Use a long butterfly when you have a precise price target and expect the underlying to gravitate toward it by expiration, and when you want a cheap, defined-risk expression of that view. It suits pin scenarios around heavy open-interest strikes or expected mean reversion to a level, and it is most attractive when the small debit offers a large payoff-to-cost ratio if the target is hit. The trade needs the underlying to land near the middle strike at expiry, so it rewards accuracy on both level and timing; a target that is close but not hit still leaves much of the payoff unrealised.
Greeks profile
| Delta | Near zero at entry when centred at-the-money, tilting as the underlying moves toward a wing. |
| Gamma | Short gamma near the middle strike and long gamma near the wings, so the position wants the underlying to settle, not swing. |
| Theta | Positive when the underlying is near the middle strike, as the short middle calls decay in your favour. |
| Vega | Short vega near the middle strike; falling implied volatility helps a butterfly that is near its target. |
Max profit, max loss & break-evens
Max profit = distance between the lower and middle strikes − net debit, reached if the underlying finishes at the middle strike. Max loss = net debit paid, realised if the underlying finishes below the lowest strike or above the highest. Lower BE = lower strike + net debit · Upper BE = higher strike − net debit
Concrete example
A stock trades at 100 and you expect it to pin there. You buy the 95 call, sell two 100 calls, and buy the 105 call for a net debit of about 1. If the stock finishes at 100, the 95 call is worth 5 and the rest expire worthless, for a 4-point profit on a 1 debit. If it finishes below 95 or above 105 you lose the 1 debit. Break-evens are 96 and 104, a narrow zone that rewards a precise pin.
Risks & management
The profit zone is narrow and the maximum payoff only occurs at the exact middle strike, so the trade demands accuracy and often finishes with only partial value even when the direction is right. The maximum loss is the small debit, which is the appeal, but the low cost reflects the low probability of a perfect pin. Manage by taking profit as the underlying approaches the middle strike rather than holding for the exact peak, and by sizing for the fact that most butterflies expire for a fraction of their maximum value. It is a low-cost lottery on a precise outcome, not a high-probability income trade.
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