Butterfly

A butterfly is a sniper shot — cheap to put on, but it only pays well if the stock lands at one exact price.

What a butterfly is made of

A butterfly is a three-strike structure with a 1-2-1 ratio, built from a single option type (all calls or all puts) using equally spaced strikes. The long, or debit, butterfly — the one you pay to open — works like this:

• Buy one option at the lower strike.
• Sell two options at the middle strike.
• Buy one option at the upper strike.

The strikes are evenly spaced, so the gap from the lower to the middle strike equals the gap from the middle to the upper strike. Selling two at the center and buying one on each side is what gives the position its tent-like payoff. For background on long versus short legs, see the guide index.

What it is betting on

A long butterfly is a bet that the stock pins the middle strike at expiration. It is a low-cost, low-probability, high-reward structure: you risk a small amount for the chance at a much larger payoff, but only if the stock lands close to that one central price.

The shape of profit and loss

The payoff diagram is a tent. It peaks sharply at the middle strike and slopes down on both sides to a small, fixed loss outside the outer strikes.

• Max profit (at expiration, with the stock exactly at the middle strike) = the distance between adjacent strikes minus the net debit paid.
• Max loss = the net debit, paid if the stock finishes at or beyond either outer strike. This is a defined-risk position.
• Breakevens = the lower strike plus the debit, and the upper strike minus the debit.

A worked example

Suppose a stock trades near 100 and you build a call butterfly with strikes at 95, 100, and 105, each five points apart, for a net debit of 1.50 (150 dollars per one-lot, since each contract covers 100 shares).

• Composition: buy one 95 call, sell two 100 calls, buy one 105 call.
• Max profit: 5.00 strike spacing minus 1.50 debit = 3.50 (350 dollars), only if the stock closes at exactly 100.
• Max loss: the 1.50 debit (150 dollars), if the stock finishes at or below 95, or at or above 105.
• Lower breakeven: 95 + 1.50 = 96.50.
• Upper breakeven: 105 − 1.50 = 103.50.

The trade is profitable between 96.50 and 103.50, but the full 350-dollar payoff requires the stock to land right on 100. Risking 150 to make up to 350 is the source of the attractive ratio — and the reason the win is so narrow.

Butterfly versus condor

A condor is the close relative that splits the single middle strike into two separate short strikes, turning the sharp peak into a wide plateau. The condor costs more and tops out lower but forgives a wider miss; the butterfly is cheaper and pays more at its one ideal price but demands precision.

The honest failure mode

The most common result is a small loss. Because the peak is a single point, the stock usually finishes off-center and the butterfly expires either for partial value or for the full (small) debit loss. The structure also fights against time and movement in a subtle way: even if the stock sits near the center early, it can drift away before expiration, and the rich center payoff only crystallizes right at the end. A related credit-based shape, the iron butterfly, expresses the same pin-the-center idea while collecting premium up front instead of paying a debit.

Educational only — not investment advice. Options involve a substantial risk of loss and are not suitable for every investor.