Butterfly spread strategy — how it works
A butterfly spread is a low-cost, defined-risk bet that the price pins near a strike. Learn the three-strike structure and payoff.
A long butterfly is a low-cost, defined-risk strategy that profits when the underlying finishes near a specific strike at expiry. It's built from three strikes and is popular around expiry when you expect the market to "pin".
The structure (call butterfly)
- Buy 1 lower-strike call
- Sell 2 middle-strike calls
- Buy 1 higher-strike call
(Strikes equally spaced, same expiry. A put butterfly mirrors this.)
Payoff
- Max profit: at the middle strike at expiry.
- Max loss: the small net premium paid (very limited).
- Cheap with a high reward-to-cost ratio if your target strike is right.
When to use it
When you expect low movement and the price to settle near a specific level — e.g. pinning near a round number at expiry.
How to build it
Use the Strategy Builder to add the four legs and see the tent-shaped payoff before deploying.
FAQ
When does a butterfly make maximum profit?
When the underlying closes exactly at the middle strike at expiry.
Is it risky?
Risk is very limited (the small net premium), but it needs the price to land near your target strike.
Butterfly vs iron condor?
A butterfly targets one strike (narrow peak); an iron condor profits over a wider range.