What Is Butterfly Spread?
A long butterfly spread combines buying one ITM option, selling two ATM options, and buying one OTM option — all of the same type (calls or puts) and same expiration. The trade is cheap to enter and profits maximally if the underlying ends exactly at the middle strike.
Maximum profit equals the distance between strikes minus the net debit paid. Maximum loss equals only the debit, no matter how far the underlying moves either way. The reward-to-risk can be 5:1 or higher on tight butterflies near expiration.
Butterflies are low-cost, low-probability bets that work when you have a precise price target. They underperform when the underlying drifts away from the middle strike. Common use: targeting a specific reaction to a news event or earnings release where you have a price view but want to limit risk.
Related terms
- Options Contract — A derivative giving the right (but not obligation) to buy or sell an asset at a set price by a set date.
- Vertical Spread — Two-leg options strategy: long and short of the same type at different strikes, same expiration.
- Iron Condor — Four-leg neutral strategy collecting premium when the underlying stays in a range.
- Calendar Spread — Buying a longer-dated option and selling a shorter-dated option at the same strike.