What Is a Butterfly Spread? Strategy, Payoff, Risk and Example

# What Is a Butterfly Spread?

A long call butterfly spread is a defined-risk options strategy that combines three strikes with the same expiry:

•Buy one lower-strike call

•Sell two middle-strike calls

•Buy one higher-strike call

It generally has limited profit and limited loss and is designed around the underlying finishing near the middle strike.

NIFTY Example

Suppose NIFTY is around 24,500.

A trader uses:

•Buy 24,400 Call

•Sell two 24,500 Calls

•Buy 24,600 Call

Assume premiums are:

•24,400 Call = ₹150

•24,500 Call = ₹100

•24,600 Call = ₹65

Net debit:

₹150 − (2 × ₹100) + ₹65 = ₹15

Using an illustrative 65-unit lot:

Maximum loss = ₹15 × 65 = ₹975

Maximum Profit

The strike spacing is 100 points.

Maximum profit per unit:

₹100 − ₹15 = ₹85

Maximum profit:

₹85 × 65 = ₹5,525

This occurs at the middle strike at expiry, assuming the standard long-call butterfly structure.

Breakevens

Lower breakeven:

Lower strike + net debit = 24,400 + 15 = 24,415

Upper breakeven:

Higher strike − net debit = 24,600 − 15 = 24,585

Expiry Payoff

| NIFTY at Expiry | Approx. P&L/unit |

|---:|---:|

| 24,300 | −₹15 |

| 24,400 | −₹15 |

| 24,450 | +₹35 |

| 24,500 | +₹85 |

| 24,550 | +₹35 |

| 24,600 | −₹15 |

| 24,700 | −₹15 |

Why Use a Butterfly?

A trader may use it when expecting the underlying to finish near a particular price at expiry.

The strategy has a narrow profit zone and defined maximum loss.

Key Risks

•Profit is available only within a defined range.

•A large move away from the middle strike can result in maximum loss.

•Liquidity and transaction costs matter.

•Implied volatility changes can affect the position before expiry.

Key Takeaways

•Long butterfly uses three strikes and four option contracts.

•Maximum loss is the net debit.

•Maximum profit is limited.

•Profit is concentrated around the middle strike.

•It is a defined-risk strategy.

FAQs

Is a butterfly bullish or bearish?

A standard long butterfly is primarily a range/target-price strategy rather than a simple bullish or bearish trade.

Is risk unlimited?

No. Maximum loss is the net debit.

When is maximum profit achieved?

At the middle strike at expiry for the standard structure.

Final Thoughts

The butterfly spread demonstrates how options can be structured around an expected expiry range rather than a simple up-or-down view.

> Disclaimer: Educational only; not financial advice. Options involve substantial risk. Verify current contract specifications before trading.