Butterfly Spread
A 3-leg defined-risk options strategy: buy 1 lower-strike, sell 2 middle-strike, buy 1 higher-strike — all at the same expiry. Max profit if price pins the middle strike.
Formula
Max Profit = Spread Width − Net Debit | Max Loss = Net Debit
A butterfly spread uses three strikes at equal width: buy one option at the lower strike, sell two at the middle strike, and buy one at the upper strike — all the same expiry and type (all calls or all puts). The net debit paid is the maximum possible loss.
Maximum profit occurs if the underlying closes exactly at the short middle strike at expiry, where the inner spread is fully in the money and the outer spread expires worthless. It is a high-probability, low-payout setup when the middle strike is near current price.
Butterflies are used when you expect price to pin near a level — around a strong support/resistance or the expected close after a quiet expiration.
Example
With SPY at $525, buy the $520 call, sell two $525 calls, buy the $530 call for a net debit of $1.20. Max profit = $5.00 − $1.20 = $3.80 if SPY closes at exactly $525 at expiry. Max loss = $1.20 debit paid.
Related Terms
Call Option
An options contract giving the buyer the right to purchase the underlying asset at the strike price before or on expiration.
BeginnerExpiration Date
The last date on which an option can be exercised; after this date the contract ceases to exist.
IntermediateIron Condor
A four-leg options strategy that sells an OTM call spread and an OTM put spread simultaneously, profiting when the underlying stays range-bound.
AdvancedPut Option
An options contract giving the buyer the right to sell the underlying asset at the strike price before or on expiration.
BeginnerStrike Price
The fixed price at which the option holder can buy (call) or sell (put) the underlying asset if they choose to exercise.
BeginnerVertical Spread
An options strategy involving the simultaneous buy and sell of two options of the same type and expiration but at different strikes, limiting both risk and reward.
Intermediate