# Butterfly Spread

> A butterfly spread buys one option, sells two at a middle strike and buys one higher. Learn the payoff, why it is cheap, broken wing variants and how to use it.

Source: https://learn.tradelabsai.com/options/butterfly-spread/  
Track: Options · Level: Advanced · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "Butterfly Spread", https://learn.tradelabsai.com/options/butterfly-spread/

A butterfly spread is a three strike options strategy that profits most if the underlying finishes at a specific price at expiration. The classic long call butterfly buys one lower strike call, sells two middle strike calls and buys one higher strike call, all with the same expiry and equal spacing between strikes. It costs little, has a small defined maximum loss and can pay several times its cost if the price lands near the middle strike. Traders use butterflies to target a price level cheaply.

## Construction

| Leg | Quantity | Example (stock at $100) |
|---|---|---|
| Buy lower call | 1 | $95 call |
| Sell middle call | 2 | $100 calls |
| Buy higher call | 1 | $105 call |

A butterfly is equivalent to a bull call spread ($95/$100) plus a bear call spread ($100/$105). Puts can be used instead of calls with the same payoff, as put call parity implies.

## Payoff at a glance

| Feature | Long butterfly |
|---|---|
| Outlook | Price will finish near the middle strike |
| Maximum loss | Net debit |
| Maximum gain | Strike spacing minus net debit (at the middle strike) |
| Break evens | Lower strike + debit; upper strike minus debit |
| Time decay | Helps near the middle strike, hurts far from it |
| Implied volatility | Rising volatility usually hurts |

*Figure: A long butterfly at expiration.*

## Worked example

**Example: A cheap price target trade**
A stock trades at $100 and you expect it to drift to about $105 by expiry in three weeks. You buy a $100/$105/$110 call butterfly: buy the $100 call for $3.00, sell two $105 calls at $1.10 each and buy the $110 call for $0.35. Net debit: 3.00 minus 2.20 plus 0.35 = $1.15 ($115).

| Stock at expiry | Result per butterfly |
|---|---|
| $100 or below | minus $115 |
| $101.15 | $0 (break even) |
| $105 | +$385 (maximum: $5 minus $1.15) |
| $108.85 | $0 (break even) |
| $110 or above | minus $115 |

You risk $115 to make up to $385. The trade wins only if the stock finishes between about $101 and $109.

## Why butterflies are cheap

The two short options pay for most of the long options. The low cost reflects the low chance of the stock finishing near the middle strike. Before costs, expected value is close to zero; the edge must come from a good view of where price is likely to settle. See [Expected Value](https://learn.tradelabsai.com/math/expected-value/).

## Variants

- **Broken wing butterfly:** the strikes are unequal, for example $100/$105/$112. This shifts risk to one side, and can sometimes be opened for a credit so that there is no loss if the price moves the other way.
- **Iron butterfly:** a credit version using puts and calls. See [Iron Butterfly](https://learn.tradelabsai.com/options/iron-butterfly/).
- **Put butterfly:** same structure with puts, often used for bearish targets.
- **Condor:** like a butterfly but with two different middle strikes, giving a wider, flatter profit zone. See [Iron Condor](https://learn.tradelabsai.com/options/iron-condor/).

## When to use a butterfly

- **A clear price target** such as a resistance level, a large open interest strike or a measured move. See [Options Open Interest Analysis](https://learn.tradelabsai.com/options/options-open-interest-analysis/).
- **Expected low volatility** after an event.
- **Cheap speculation** with very limited risk.

## Managing a butterfly

- **Profits arrive late:** a butterfly gains most of its value in the last days before expiry if price is near the middle strike.
- **Take profits** when the spread reaches a good share of maximum value; trying to capture the full maximum is risky because of high gamma near expiry. See [Gamma](https://learn.tradelabsai.com/options/gamma/).
- **Close before expiry** to avoid assignment on the short options.

## Common mistakes

- **Expecting maximum profit,** which needs a precise finish.
- **Ignoring bid ask spreads** across four contracts; enter as a single order with a limit price.
- **Using butterflies far from expiry** and expecting quick gains.

## Frequently asked questions

### What is a butterfly spread?

A three strike options strategy that buys one lower and one higher strike option and sells two at the middle strike, profiting most if the price ends at the middle strike.

### What is the maximum loss on a long butterfly?

The net debit paid, which occurs if the underlying finishes at or beyond either outer strike.

### What is a broken wing butterfly?

A butterfly with unequal strike spacing, which shifts risk to one side and can sometimes be opened for a credit.

Next, learn to profit from big moves in either direction with the [Straddle](https://learn.tradelabsai.com/options/straddle/).

## Continue learning

- Next lesson: [Straddle](https://learn.tradelabsai.com/options/straddle/)
- Previous lesson: [Iron Butterfly](https://learn.tradelabsai.com/options/iron-butterfly/)
- Related: [Iron Butterfly](https://learn.tradelabsai.com/options/iron-butterfly/): An iron butterfly sells an at the money straddle and buys wings for protection. Learn the payoff, how it compares with an iron condor and how to manage it.
- Related: [Iron Condor](https://learn.tradelabsai.com/options/iron-condor/): An iron condor sells a put spread and a call spread to profit if price stays in a range. Learn the payoff, strike and width choices, adjustments and the main risks.
- Related: [Vertical Spreads](https://learn.tradelabsai.com/options/vertical-spreads/): A vertical spread buys and sells options of the same type and expiry at different strikes. Learn debit vs credit spreads, the four types and how to choose widths.
- Related: [Gamma](https://learn.tradelabsai.com/options/gamma/): Gamma measures how much an option's delta changes for a $1 move in the underlying. Learn why gamma peaks at the money near expiry and how it drives risk.
- Related: [Option Payoff Diagrams](https://learn.tradelabsai.com/options/option-payoff-diagrams/): Payoff diagrams show an option position's profit or loss at expiration across prices. Learn to read and draw them for single options and multi leg strategies.