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Butterfly Spread explained

The butterfly spread is a neutral strategy that is a combination of a bull spread and a bear spread. It is a limited profit, limited risk options strategy. There are 3 striking prices involved in a butterfly spread and it can be constructed using calls or puts.

Long Call Butterfly

Long butterflies are entered when the investor thinks that the underlying stock will not rise or fall much by expiration. Using calls, the long butterfly can be constructed by buying one lower striking in-the-money call, writing two at-the-money calls and buying another higher striking out-of-the-money call. A resulting net debit is taken to enter the trade.

Limited Profit

Maximum profit is attained when the underlying stock price remains unchanged at expiration. At this price, only the lower striking call expires in the money.

Maximum profit = (intrinsic value of lower striking call at expiration) minus (initial debit taken) minus (commissions)
Limited Risk

Maximum loss is limited to the initial debit taken to enter the trade plus commissions.


Suppose XYZ stock is trading at $40 in June. An options trader executes a long call butterfly by purchasing a JUL 30 call for $1100, writing two JUL 40 calls for $400 each and purchasing another JUL 50 call for $100. The net debit taken to enter the position is $400, which is also his maximum possible loss.

On expiration in July, XYZ stock is still trading at $40. The JUL 40 calls and the JUL 50 call expire worthless while the JUL 30 call still has an intrinsic value of $1000. Subtracting the initial debit of $400, the resulting profit is $600, which is also the maximum profit attainable.

Maximum loss results when the stock is trading below $30 or above $50. At $30, all the options expires worthless. Above $50, any “profit” from the two long calls will be neutralised by the “loss” from the two short calls. In both situations, the butterfly trader suffers maximum loss which is the initial debit taken to enter the trade.

Long Put Butterfly

The long butterfly trading strategy can also be created using puts instead of calls and is known as a long put butterfly.

Short Butterfly

The converse strategy to the long butterfly is the short butterfly. Short butterfly spreads are used when high volatility is expected to push the stock price in either direction.

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Wednesday 18th of April 2012

Yes Ben is correct in this regards. The problem with Butterflies or multi-legged strategies is the legging in of the trade. Doing it in one go will create slippage and on top of the commission that you have to pay on each leg it becomes costly. Butterflies is a strategy that you have to forecast where the underlying will expire more or less which is really the hard part.




Wednesday 18th of April 2012

hi Ric, agreed. When carrying out testing it is always important to focus on slippage cost as well


Saturday 14th of July 2007

Hi ben, nice to meet you. First of all thank you for your comments on the butterfly trade.

Secondly, the butterfly is an area totally new to me. I'm exploring the possible trades and counters that i can do a butterfly trade on.btw, do you have some counters that meet your selection criteria? do you have a blog yourself?

What i do most in terms of options is to conduct Iron condors on RUT. It has been profitable, but one has to really understand the system and the concept of proability and high risk.

Do keep me posted on your butterfly experience Ben.

Ben Evans

Tuesday 3rd of July 2007

Good post. I would like to add a few things to your butterfly spread post because this is one of my favorite trades.

Butterfly's are indeed a very good range bound trade. The key reasons for trading long butterflies is that the premiums are typically cheap and the maximum risk is the premium paid.

I tend to like butterfly trades during OE. The biggest problem in these trades is getting fills. It is hard to to get all fills on both opening trades and closing trades so this tends to be a position that is quite often legged into.

There are many technical aspects to butterfly trades that people should understand. They approach the spread with time. Depeding on where a person plays the spreads (centered ATM, near ATM, OTM, or ITM), they can take advantage of increasing or decreasing IV.

If a person is looking for a larger range trade, the can play a long call or a long put condor (Not to be mistaken with a Iron Condor which uses both puts and calls).

The case for short butterfly spreads is usually when other spread strategies (like a put debit and a call debit) are too expensive. Like back spreads for credits, the short butterfly spreads can produce large losses if the stock ends OE on the long strikes.

Happy trading and have a good 4th.

Best regards,


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