Advanced Strategies: Butterflies
Butterflies are precision trades that profit if price lands near a target. They use three strikes to create a "profit tent" with limited risk and limited reward.
Before You Trade
These examples and charts are simplified teaching models. Confirm live pricing, liquidity, and assignment risk in your broker before placing real trades.
Structure
Long wing, short body, long wing
A long call butterfly uses 1 long call below, 2 short calls at the middle strike, and 1 long call above. The middle strike is your price target.
Example butterfly on a $100 stock: buy 95 call, sell 2x 100 calls, buy 105 call, $1.80 debit.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Profit Tent
Highest reward at the middle strike
The butterfly pays most if price pins the middle strike at expiration. As you move away, profits fade quickly. This is why butterflies are often used around expected "pin" prices like earnings or support/resistance.
Simple example
Greeks
Gamma spike near the target
Butterflies have a big gamma spike near the middle strike. That means delta can change fast if price moves. They also carry negative vega, so falling IV helps.
Delta and gamma around the target strike.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Typical Greek mix for a centered butterfly.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
When They Shine
Quiet markets with a clear target
Butterflies work best when you can identify a likely landing zone and expect volatility to cool off. They are popular before earnings if you have a strong range view, or after a big move when price often stalls.
Risk reminder
Who This Is For
Traders who understand multi-leg options and want a low-cost, defined-risk way to target a specific price zone at expiration.
Learning Objectives
- • Explain the butterfly structure: 1 long wing + 2 short body + 1 long wing.
- • Calculate max profit (at the middle strike) and max loss (debit paid).
- • Understand why gamma spikes near the middle strike, causing rapid delta changes.
- • Identify when butterflies work best: quiet markets with a clear price target.
Risk Note
Butterflies are cheap but have a narrow profit zone. If the stock moves far from your target, you lose the full debit paid. They are also very sensitive to where the stock finishes at expiration—a few dollars can mean the difference between max profit and max loss.
Example Walkthrough
Scenario: XYZ is at $100. You buy a long call butterfly: buy 1 $95 call, sell 2 $100 calls, buy 1 $105 call. Net debit: $1.80 ($180 total).
Best case: XYZ finishes at exactly $100
The $95 call is worth $5. The two $100 calls expire worthless. The $105 call expires worthless. Profit = ($5 − $1.80) × 100 = +$320.
Worst case: XYZ below $95 or above $105
All legs expire worthless (or cancel out). Max loss = debit paid = −$180.
Breakevens: $95 + $1.80 = $96.80 (lower) and $105 − $1.80 = $103.20 (upper). The stock must finish between these prices for any profit.
Common Mistakes
Holding through surprise news
Butterflies need precision. A surprise event can move the stock far from your target, resulting in full loss of the debit.
Targeting too narrow a range
Using very close strikes (e.g., $1 wide) is cheap but extremely unlikely to pin. Wider wings give a bigger profit zone.
Ignoring early assignment on short legs
Near expiration, the short calls can be assigned if ITM. Be prepared to close the position before expiration week if early assignment risk is high.
Quick Recap
- • A butterfly uses three strikes to create a “profit tent” centered on your price target. Max loss is the debit paid.
- • Best when you expect the stock to finish near a specific price and volatility to be low.
- • Keep size small—butterflies are precision bets that pay off handsomely at the target but lose the debit if price moves away.
Next lesson
ZEBRAs
Up nextUse deep ITM calls to create stock-like exposure with lower cost and muted theta decay.
ContinueKeep Going
Ready to apply this to your own trades?
Theta Tracker helps you log positions quickly, follow P&L, and review your decisions over time. Start with a free account and keep your process organized from day one.
Create your free account