# Butterfly Spread: What It Is and How Options Traders Use It

Published: 2026-03-16
Author: Warren Team
URL: https://www.heywarren.com/blog/butterfly-finance

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A [butterfly spread](/blog/butterfly-spread) is an options trading strategy that combines multiple options contracts to create a limited-risk, limited-profit position that profits most when the underlying asset stays near a specific price at expiration. The name comes from the payoff diagram's shape, wider wings on both sides, a profitable peak in the middle, resembling a butterfly. Butterfly spreads are popular among options traders who expect low volatility in an underlying stock or index and want to profit from price stability while clearly defining their maximum loss. Unlike simple long or short options positions, the butterfly spread profits from time decay and narrow price movement, making it a useful tool in range-bound markets.

## How a Butterfly Spread Works

A standard **long call butterfly** involves:
1. **Buy 1 in-the-money (ITM) call** at a lower strike (K₁)
2. **Sell 2 at-the-money (ATM) calls** at the middle strike (K₂)
3. **Buy 1 out-of-the-money (OTM) call** at the higher strike (K₃)

![A long call butterfly combines four options across three strikes: buy ITM, sell two ATM, buy OTM.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20660%20125%22%20width%3D%22660%22%20height%3D%22125%22%20role%3D%22img%22%3E%3Ctitle%3EFlow%20diagram%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Crect%20x%3D%2230%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22115%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EBuy%201%20ITM%20Call%3C%2Ftext%3E%3Ctext%20x%3D%22115%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3EK%E2%82%81%20%3D%20%2495%3C%2Ftext%3E%3Cline%20x1%3D%22205%22%20y1%3D%2262.5%22%20x2%3D%22237%22%20y2%3D%2262.5%22%20stroke%3D%22%2364748b%22%20stroke-width%3D%222%22%2F%3E%3Cpolygon%20points%3D%22244%2C62.5%20235%2C57.5%20235%2C67.5%22%20fill%3D%22%2364748b%22%2F%3E%3Crect%20x%3D%22245%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22330%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3ESell%202%20ATM%20Calls%3C%2Ftext%3E%3Ctext%20x%3D%22330%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3EK%E2%82%82%20%3D%20%24100%3C%2Ftext%3E%3Cline%20x1%3D%22420%22%20y1%3D%2262.5%22%20x2%3D%22452%22%20y2%3D%2262.5%22%20stroke%3D%22%2364748b%22%20stroke-width%3D%222%22%2F%3E%3Cpolygon%20points%3D%22459%2C62.5%20450%2C57.5%20450%2C67.5%22%20fill%3D%22%2364748b%22%2F%3E%3Crect%20x%3D%22460%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22545%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EBuy%201%20OTM%20Call%3C%2Ftext%3E%3Ctext%20x%3D%22545%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3EK%E2%82%83%20%3D%20%24105%3C%2Ftext%3E%3C%2Fsvg%3E)

*A long call butterfly combines four options across three strikes: buy ITM, sell two ATM, buy OTM.*

Where the strikes are equidistant: K₂ − K₁ = K₃ − K₂

This creates a **net debit**, the two calls sold partially offset the cost of the two calls bought, but the position has a net cost that represents the maximum loss.

**Example**:
- Stock XYZ trading at $100
- Buy 1 call at $95 strike: pays $8 premium
- Sell 2 calls at $100 strike: receives $5 × 2 = $10
- Buy 1 call at $105 strike: pays $2 premium
- Net debit: $8 − $10 + $2 = **$0 net cost** (unusual; often slightly positive)

More typically with real options pricing:
- Net cost: $1.50 per share = $150 total (one contract = 100 shares)

## Profit and Loss Profile

| Scenario at Expiration | Profit/Loss |
|---|---|
| Stock far below K₁ ($95) | Maximum loss = net debit paid |
| Stock at K₂ ($100) exactly | Maximum profit = width of spread − net debit |
| Stock far above K₃ ($105) | Maximum loss = net debit paid |
| Stock between K₁ and K₃ | Partial profit |

![Long butterfly max profit ($350) versus max loss ($150) on a one-contract position.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20800%20210%22%20width%3D%22800%22%20height%3D%22210%22%20role%3D%22img%22%3E%3Ctitle%3EComparison%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Ctext%20x%3D%22230%22%20y%3D%2257.5%22%20text-anchor%3D%22end%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EMax%20Profit%3C%2Ftext%3E%3Crect%20x%3D%22240%22%20y%3D%2225%22%20width%3D%22450%22%20height%3D%2255%22%20rx%3D%226%22%20fill%3D%22%232563eb%22%2F%3E%3Ctext%20x%3D%22702%22%20y%3D%2257.5%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22%232563eb%22%3E%24350%3C%2Ftext%3E%3Ctext%20x%3D%22230%22%20y%3D%22152.5%22%20text-anchor%3D%22end%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EMax%20Loss%3C%2Ftext%3E%3Crect%20x%3D%22240%22%20y%3D%22120%22%20width%3D%22192.85714285714283%22%20height%3D%2255%22%20rx%3D%226%22%20fill%3D%22%237c3aed%22%2F%3E%3Ctext%20x%3D%22444.85714285714283%22%20y%3D%22152.5%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22%237c3aed%22%3E%24150%3C%2Ftext%3E%3C%2Fsvg%3E)

*Long butterfly max profit ($350) versus max loss ($150) on a one-contract position.*

**Maximum profit** = (K₂ − K₁) − Net debit = $5 − $1.50 = **$3.50 per share = $350** (one contract)

**Maximum loss** = Net debit paid = **$1.50 per share = $150** (one contract)

**Breakeven points**:
- Lower breakeven: K₁ + Net debit = $95 + $1.50 = $96.50
- Upper breakeven: K₃ − Net debit = $105 − $1.50 = $103.50

The trader profits if the stock is between $96.50 and $103.50 at expiration, maximum profit at exactly $100.

## Long Butterfly vs. Short Butterfly

**Long butterfly**: Profits from stock staying near the middle strike (low volatility). Maximum profit if price stays flat; maximum loss if price moves sharply in either direction. This is the more common directional-neutral strategy.

**Short butterfly**: Profits from stock moving sharply away from the middle strike (high volatility). Maximum profit if price moves far outside the wings; maximum loss if price stays flat. Used when a trader expects a large move but is uncertain about direction, similar logic to buying a straddle but with lower max profit and defined loss.

| Strategy | Benefits When | Costs |
|---|---|---|
| Long butterfly | Price stays near middle strike | Costs net debit upfront |
| Short butterfly | Price moves far in either direction | Net credit received; max loss if price stays flat |
| Long straddle | Same as short butterfly | Usually higher cost than butterfly |
| Iron condor | Range-bound (wider range) | Related strategy using puts + calls |

## Butterfly Variants

**Iron butterfly**: Uses both puts and calls, sell an ATM call and ATM put, buy an OTM call and OTM put. Creates a wider profit zone but with a different risk/reward profile than a pure call or put butterfly.

![The four main butterfly spread structures vary by option type and strike symmetry.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20760%20211%22%20width%3D%22760%22%20height%3D%22211%22%20role%3D%22img%22%3E%3Ctitle%3EHierarchy%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Crect%20x%3D%22300%22%20y%3D%2220%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22%232563eb%22%2F%3E%3Ctext%20x%3D%22380%22%20y%3D%2254%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22white%22%3EButterfly%20Spread%3C%2Ftext%3E%3Cpath%20d%3D%22M%20380%2078%20L%20380%20105.5%20L%20110%20105.5%20L%20110%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%2230%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22110%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3ECall%20Butterfly%3C%2Ftext%3E%3Ctext%20x%3D%22110%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3ECalls%20only%3C%2Ftext%3E%3Cpath%20d%3D%22M%20380%2078%20L%20380%20105.5%20L%20290%20105.5%20L%20290%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%22210%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22290%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EPut%20Butterfly%3C%2Ftext%3E%3Ctext%20x%3D%22290%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3EPuts%20only%3C%2Ftext%3E%3Cpath%20d%3D%22M%20380%2078%20L%20380%20105.5%20L%20470%20105.5%20L%20470%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%22390%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22470%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EIron%20Butterfly%3C%2Ftext%3E%3Ctext%20x%3D%22470%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3EPuts%20%2B%20calls%3C%2Ftext%3E%3Cpath%20d%3D%22M%20380%2078%20L%20380%20105.5%20L%20650%20105.5%20L%20650%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%22570%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22650%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EBroken-Wing%3C%2Ftext%3E%3Ctext%20x%3D%22650%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3EUnequal%20strikes%3C%2Ftext%3E%3C%2Fsvg%3E)

*The four main butterfly spread structures vary by option type and strike symmetry.*

**Put butterfly**: Same structure as call butterfly but using put options, equivalent economic exposure but different mechanics.

**Broken-wing butterfly**: Modified butterfly where the wings are not equidistant, the trader accepts a wider potential loss on one side in exchange for slightly better risk/reward on the other. Used when the trader has a slight directional bias.

**Calendar butterfly**: Combines a butterfly spread with different expiration dates, a more complex strategy involving time decay differentials across expirations.

## When to Use a Butterfly Spread

**Earnings situations with expected stability**: If a stock is expected to remain stable after earnings (low implied volatility realisation), selling the ATM options (short butterfly) captures premium from the inflated pre-earnings implied volatility.

**Range-bound markets**: When a stock has established a tight trading range, a long butterfly centred on the middle of the range captures the expected stability at low cost.

**Low implied volatility environment**: Butterflies are relatively cheap when implied volatility is low, good risk/reward for a defined-risk range-bound position.

**Pin risk management**: Some traders use butterflies to profit from specific "pin" scenarios where a stock is expected to close near a specific strike at expiration.

## Practical Considerations

**Bid-ask spread impact**: Butterfly spreads involve 4 transactions (3 different strikes, with the middle doubled). Each leg has a bid-ask spread, wide spreads can make the trade expensive in practice. Highly liquid options on major indices (SPX, SPY) are more suitable for butterfly spreads than illiquid single-stock options.

**Commission costs**: Four-leg trades generate more commissions than simple long/short positions. Ensure the expected profit justifies the additional [transaction](/blog/what-is-a-transactions) costs.

**Assignment risk**: If the short options in the middle are exercised early (American-style options), it can disrupt the spread structure unexpectedly.

## Authoritative Sources

For deeper background and primary-source data on this topic, the following authoritative sources are useful starting points:

- [SEC, Securities and Exchange Commission](https://www.sec.gov/)
- [FINRA](https://www.finra.org/)

## Conclusion

The butterfly spread is a precision options strategy for traders who expect price stability around a specific level, offering defined risk (the net debit) and defined maximum reward (the spread width minus the net debit). Its multi-leg structure makes it more complex than simple call or put buying, but the capped loss and favorable risk/reward when the trade works make it a staple of sophisticated options traders. Understanding butterfly spreads requires solid options fundamentals, including time decay, delta, and the Greeks that affect multi-leg positions.

Warren at [heywarren.com](https://heywarren.com) helps investors understand options strategies, derivatives risk management, and the pricing mechanics behind equity and index options.

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## Related Reading

**More from Warren**:
- [ESOS Meaning: Employee Share Option Schemes Explained](/blog/esos)
- [Strike Prices: What They Mean and How They Affect Options Value](/blog/strike-prices)
- [Credit Default Swap: What It Is and How Credit Risk Is Priced](/blog/credit-default-swap)

**Authoritative sources**:
- [CBOE, Options Education](https://www.cboe.com/education/)
- [OCC, Options Clearing Corporation, Investor Resources](https://www.theocc.com/risk-management/market-risk-management)
- [FINRA, Options Trading](https://www.finra.org/investors/learn-to-invest/types-investments/options)