Butterfly Spread
A butterfly spread is a neutral options strategy that combines two vertical spreads to create a position with limited profit potential at a specific target price and capped risk on both sides.
The butterfly spread gets its name from the shape of its payoff diagram, which resembles wings extending outward from a center body. In its most common form — the long call butterfly — a trader purchases one in-the-money call, sells two at-the-money calls, and buys one out-of-the-money call, all with the same expiration date. The result is a structure where maximum profit is realized if the underlying stock closes exactly at the middle strike price at expiration.
For example, with a stock trading at $100, a trader might construct a butterfly by buying a $95 call, selling two $100 calls, and buying a $105 call. The maximum gain occurs if the stock sits at $100 at expiration. The maximum loss, meanwhile, is limited to the net premium paid to enter the trade — making this a defined-risk structure that many traders find appealing compared to naked directional bets.
Butterfly spreads are particularly popular in low-volatility environments, or when a trader believes the underlying will remain rangebound through expiration. Because the strategy profits most from time decay eroding the sold options at the center strike, it is sensitive to changes in implied volatility and benefits from stable price action. Traders on platforms like thinkorswim and Tastyworks frequently use butterflies around earnings dates when they expect muted movement despite elevated IV.
The CBOE lists options on thousands of U.S. equities, ETFs, and indexes, and all these contracts are cleared by the Options Clearing Corporation (OCC), which guarantees both sides of every trade. Because butterfly spreads involve multiple legs — typically three options — commission costs and bid-ask spreads can meaningfully affect profitability, especially on lower-priced underlyings.
There are several variants beyond the standard long call butterfly: iron butterflies use a combination of calls and puts centered around the same strike, and broken-wing butterflies deliberately skew one of the outer strikes to create an asymmetric payoff. Understanding the mechanics of a basic butterfly is a prerequisite for mastering these more advanced structures.