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What Is a Butterfly Spread? The Complete Guide

By Brian O'Connell · August 18, 2023 · 9 minute read

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What Is a Butterfly Spread? The Complete Guide

Options traders buy calls when they believe prices will increase and purchase puts when they think prices will drop. But is there a way to profit if traders believe either that the price will remain stable, or the price will be unstable but the direction of movement is unclear?

Enter the butterfly spread strategy.

Butterfly spreads, depending on how they’re constructed, allow you to profit from either price stability or instability. In addition, they have the advantage of allowing traders to know their maximum gains and losses over the life of the trade.

Before engaging with a butterfly options trade, it’s best to learn how the myriad parts of a butterfly trading strategy works — and how to make that strategy work for you.

Butterfly Spread Defined

The butterfly spread — so named because of its “two wings on a butterfly” structure to the payoff graphs — is a go-to strategy for seasoned options investors looking for leverage while limiting downside risk.

Butterfly spreads are an advanced trading strategy, but if you’re a beginner there are other options strategies for you to explore.

Recommended: 10 Options Trading Strategies for Beginners

A butterfly options spread is an investment strategy that aims to profit from changes in volatility, take advantage of time decay, or both.

The object is to garner big trading returns on an asset whose price remains close to the strike price (when trading volatility is low) by the time the options contract expires. Butterfly options trades can be complicated in nature, but unlike many derivative trading strategies, butterfly trading strategies offer limited (i.e., known) gains and losses.

That “limit factor” derives from bull and bear spreads that in combination provide a price neutral strategy that keeps costs low, limits losses, and hopefully generates outsized returns.

Even so, butterfly options spreads do come with investment risk. Such trades should not be deployed by an investor unless the price of the underlying asset (such as a stock, bond, mutual fund, or exchange traded fund) remains fairly stable over the option contract’s entire time period.

💡 Quick Tip: If you’re an experienced investor and bullish about a stock, buying options online (rather than the stock itself) can allow you to take the same position, with less cash outlay. It is possible to lose money trading options, if the price moves against you.

How Does a Butterfly Spread Work?

Like any options trade, a butterfly spread trade is based upon the option’s underlying asset. The option contract itself spells out how the trade is structured.

Typically, when a trader looks at calls and puts in options they are concerned about the following key elements:

•   Whether the trader is interested in call or put options.

•   Will the trader be buying or selling/writing options.

•   The strike price

•   The options premium

•   The expiration date (i.e., when the options contract ends).

With a butterfly spread, the contract owner typically forges a bullish and bearish price spread. The contract represents a neutral trading strategy with a quartet of options contracts that hold the same expiration date, but have three different strike prices (one option at a low strike price, two at-the-money options, and a fourth option at a higher strike price).

Recommended: What Are Stock Spreads?

The options at the higher and lower strike prices are equidistant from the at-the-money contract price — this represents the proper balance of the two wings attached to the butterfly’s body (i.e., the neutral options contract).

For example, if the asset is trading at $50, the higher and lower strike prices should be equally distant from the $50 strike price — at $40 and $60, for instance — each “wing” of the butterfly trading strategy would be $10 away from the current $50 asset price.

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

Butterfly Spread Example

Here’s an example of a long call butterfly spread, one of the most common forms of butterfly spread trading.

An investor decides to invest in XYZ stock where prices are stable and five-year pricing fluctuations are minimal.

XYZ is currently trading at $55 and the investor expects shares to remain stable, but doesn’t want to take on too much risk.

Here’s the butterfly spread options trade that takes full advantage of the situation but limits any downside losses.

The investor:

•   Buys an out-of-the money XYZ call expiring in two months with a strike price of $45

•   Sells two at-the-money XYZ calls with strike prices of $55 and the same expiration as above

•   Buys an out-of-the money XYZ call with a strike price of $65 also with the same expiration

Recommended: Guided to the Moneyness of Options

Note the equal balance between the three trades – each strike price is $10 from the $55 strike price on the two sold calls.

In total, the investor has purchased a pair of XYZ calls and has sold a pair of XYZ calls for the following amounts:

•   Purchase of one out-of-the-money XYZ call at $45 for $700.

•   Purchase one out-of-the-money XYZ call at $65 for $100.

•   Sell two at-the-money XYZ calls at $55, gaining $600 on the sale.

At the end of the transaction, the investor spends a net total of $200 ($700 plus $100 minus $600 equals $200).

If XYZ prices remain stable and close at $55 on the expiration date, the investor will achieve the maximum profit on the trade of $800.

Maximum Profit = Price of $45 call – Price of $55 calls + Price of $65 calls – Initial investment

Calls that are out of the money expire worthless, therefore:

Maximum Profit = ($10 – $0 + $0) * 100 shares per option – $200 = $800

If the price of XYZ moves significantly (for example, it rises above $65 or falls below $45, the butterfly spread yields the maximum loss of the $200 spent to initiate the trade.

Maximum Loss = Net Premium Paid = $200

Finally the butterfly spread has two break even points:

Lower Break Even point = Strike of Lower Strike Long Call + Net Premium Paid
Higher Break Even point = Strike of Higher Strike Long Call – Net Premium Paid


Lower Break Even point = $45 + $2 = $47
Higher Break Even point = $65 – $2 = $63

Should XYZ settle between $47 and $63 per share at expiration, the trade will be profitable. How profitable is summarized in the graph below.

Long Call Butterfly

Note: The calculations and graph above disregard transaction costs, but due to the complexity of the butterfly spread these can add up. The smart trader considers these costs when initiating and exiting trades.

Types of Butterfly Spreads

Investors looking to engage with butterfly spread trading have several types of spreads to consider.

Long Call Butterfly Spread

This type of butterfly spread has a trader purchase three positions; an out-of-the-money call option at a low strike price, the sale of two at-the-money call options, and another purchase of an out-of-the-money call option with a higher strike price as in the example above.

An investor may earn the maximum profit if the underlying asset’s price remains stable and is the same as the written calls on the expiration date.

The maximum loss is represented by the trade entry cost, with trading fees added into the final amount.

Short Call Butterfly Spread

A short call butterfly spread is the inverse of a long call butterfly spread and is initiated when an investor sells a single out-of-the money call option with a low strike price, purchases two at-the-money call options, and sells an out-of-the money call option that has a higher strike price.

Short Call Butterfly

The maximum profit is the same as the initial premium collected minus the cost of trading fees but can be achieved two ways. If the stock moves substantially higher or if the price moves substantially lower. In this case, the trader expects the stock to move significantly but doesn’t know in which direction. One market scenario might be before an earnings call where the market’s expectations of results are unclear.

The maximum loss on the trade is equal to the difference between the lowest strike price and the center strike prices less the credit received on trade initiation. This will occur if the price remains stable.

Iron Butterfly Spread

An iron butterfly spread is a four-position transaction constructed when an investor buys an out-of-the-money put option that has a lower strike price, sells a single at-of-the money put option, sells a single at-of-the money call option, and buys an out-of-the money call option that has a higher strike price.

Iron Butterfly

Maximum profit is achieved when the underlying asset is equal to the middle option strike price, along with the premiums provided via the iron butterfly spread trading strategy. The maximum loss is represented by the strike differential of the middle strike price minus the lower strike price less any premiums earned.

Pros and Cons of Using a Butterfly Spread

All options trades have advantages and disadvantages and butterfly spreads are no exception.

Pros of Butterfly Spreads

While profit is always the primary hoped for benefit of engaging in a trade, butterfly spreads do offer more.

Flexibility. Butterfly spread options allow the trader to construct trades to take advantage of varying scenarios.

Risk is limited. With a butterfly options trade, the maximum risk is limited and cannot exceed the parameters laid out upon initiation of the trade. Many options strategies can expose traders to unlimited losses.

Few surprises. With a butterfly options trade, a trader goes in knowing the maximum profit and loss linked to the trade.

Cons of Butterfly Spreads

Like any securities trade (especially with options trading), risks are a reality with butterfly spread trading. These potential downsides should be considered before engaging in any butterfly spread trades.

Complexity. There are scenarios where butterfly spreads are built with three or four different positions. This complexity comes with added transaction costs which can eat into potential profits. Butterfly spread options trading is complicated and not recommended for new investors.

Limited Reward. Butterfly options partner limited risk with limited reward. Hitting a home run with an option that allows an unlimited payoff is not in the cards here.

Assignment Risk. Options can be assigned at any time prior to expiration if an option is in the money. With so many moving parts the risk of assignment is real, with the other disadvantage that the butterfly spread collapses if any leg is assigned. This is manageable, but is a real risk.

Butterfly Spread Pros

Butterfly Spread Cons

Butterfly spreads are very flexible ways to profit from volatility or the lack thereof Complexity comes with higher transaction costs
Limited Risk Limited Reward
Few surprises Assignment Risk

Use Your Options Trading Knowledge Today!

Investors looking to leverage butterfly spread options should know the trading strategy is complex and not without risk.

That said, a butterfly spread options strategy can yield significant profits if the expected scenario develops — and if the investor commits to the narrow options trading strategy that butterfly options trading demands.

Qualified investors who are ready to try their hand at options trading, despite the risks involved, might consider checking out SoFi’s options trading platform. The platform’s user-friendly design allows investors to trade through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors.

With SoFi, user-friendly options trading is finally here.


Photo credit: iStock/Kateryna Medetbayeva

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