Butterfly Spread
A neutral options strategy combining bull and bear spreads with three strike prices, profiting when the stock stays near the middle strike at expiration.
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Explained Simply
A long call butterfly involves buying 1 ITM call, selling 2 ATM calls, and buying 1 OTM call — all with the same expiration. Maximum profit occurs when the stock lands exactly at the middle strike at expiration. The risk is limited to the net premium paid.
For example: buy 1 $95 call, sell 2 $100 calls, buy 1 $105 call. If the stock closes at $100, you make the maximum profit. Above $105 or below $95, you lose only the initial premium.
Butterflies are low-cost, high-ratio trades: risking $0.50 to make $4.50 (9:1) is common, with the catch that the stock must land very close to the middle strike to capture most of the gain. This makes butterflies a precision tool — best used when you have a specific price target rather than just a range.
Variants include the put butterfly (using puts instead of calls), the iron butterfly (selling a straddle and buying a strangle — the ATM version of an iron condor), and the broken-wing butterfly (asymmetric strikes that reduce cost by taking on more risk on one side).
Butterfly vs. Iron Condor: Choosing the Right Structure
Both are neutral strategies that profit from a stock staying in a range, but with different risk profiles and precision requirements:
- Iron condor: Wide profit zone (the gap between the two short strikes), lower maximum reward-to-risk ratio. Works well when the stock could land anywhere in a broad range. Typical R:R is 1:3 to 1:5 (risk $3-$5 to make $1 of credit).
- Butterfly: Narrow profit zone centered on the middle strike, but very high maximum reward-to-risk ratio (up to 1:10+). Requires the stock to land close to a specific price. Best used when you have a specific price target.
Iron condors win when precision is low. Butterflies win when precision is high. Many traders use iron condors as their primary neutral strategy and butterflies when they have high conviction about where a stock will be at expiration (e.g., pinning to max pain at OpEx).
Broken-Wing Butterfly
A standard butterfly has equal wing widths (e.g., $5/$10/$15 strikes with $5 wings on each side). A broken-wing butterfly (BWB) uses unequal wings — one side is wider than the other. This creates an asymmetric payoff: one side has zero risk (or even a small credit), while the other side retains the loss potential.
Example: With the stock at $100, buy the $95 put, sell 2 $100 puts, buy 1 $107 put. The wider put wing makes this a "skip strike" butterfly. If done for a net credit, the trade can profit on both the ideal outcome (stock at $100) and even if the stock rallies sharply (credit retained if stock above $107). The downside risk is concentrated to the lower wing.
BWBs are popular for positioning around a specific level while reducing or eliminating the upside loss.
How to Use Butterfly Spread
- 1
Select a Neutral Outlook Stock
Butterfly spreads profit when the stock stays near a specific price at expiration. Choose an underlying you expect to trade sideways or have a predictable target price. High-IV stocks give better premiums for the spread.
- 2
Choose Your Strike Prices
A long call butterfly: buy 1 lower-strike call, sell 2 middle-strike calls, buy 1 higher-strike call. The middle strike should be at your expected price at expiration. Wings should be equidistant (e.g., 95/100/105 for a $100 stock).
- 3
Calculate Cost and Risk
The net debit is your max loss. Max profit = distance between strikes - net debit paid. For a 95/100/105 butterfly costing $1.50, max profit is $5.00 - $1.50 = $3.50 per share (if the stock closes exactly at $100 at expiration).
- 4
Time the Entry
Enter butterflies 2-4 weeks before expiration when theta decay accelerates on the short legs. The sweet spot is selling the body (2 middle strikes) when their time value is decaying fastest relative to the wings.
- 5
Manage the Position
Close at 50% of max profit rather than holding to expiration — the last 50% carries disproportionate risk. If the stock moves significantly away from the middle strike early, the butterfly loses value quickly — cut losses at 50-75% of the debit paid.
Frequently Asked Questions
What is the maximum profit and loss on a butterfly spread?
For a long call butterfly: max profit = (wing width − net debit) × 100, achieved when the stock closes exactly at the middle strike. Max loss = net debit paid × 100, achieved when the stock closes above the upper wing or below the lower wing at expiration. Example: $5-wide wings, pay $0.50 debit. Max profit = $4.50 × 100 = $450. Max loss = $0.50 × 100 = $50.
Can I use a butterfly spread before earnings?
Yes — a butterfly centered on the current stock price acts as a bet that the post-earnings move will be smaller than expected (similar logic to a short straddle but with defined risk). Buy the butterfly cheap when IV is elevated (because the wings you buy are expensive, but the two you sell offset much of the cost). Maximum profit if the stock barely moves; limited loss if it gaps significantly.
What is an iron butterfly?
An iron butterfly sells a straddle (ATM call + ATM put) and buys OTM wings on both sides — it is essentially an iron condor with the short strikes pinched together to the same ATM strike. The iron butterfly collects more credit than a standard iron condor because the short strikes are ATM, but the profit zone is much narrower. It is a higher-reward, lower-probability variant used when expecting the stock to pin near a specific price.
How Tradewink Uses Butterfly Spread
Tradewink's TradeRouter considers butterfly spreads when IV rank is elevated and the AI predicts range-bound price action. The system calculates optimal strike placement based on expected move calculations from the options chain. Butterfly candidates score higher when implied volatility is above the 70th percentile (overpriced options make selling the middle strikes more profitable).
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See Butterfly Spread in real trade signals
Tradewink uses butterfly spread as part of its AI signal pipeline. Get daily trade ideas with full analysis — free to start.