A Butterfly Spread is a neutral options strategy that uses three strike prices and four option legs, all with the same expiry and on the same underlying.
It profits when the asset stays close to the middle strike, making it suitable for low volatility or expiry-day scenarios.
There are two types:
Call Butterfly (using only calls)
Put Butterfly (using only puts)
Example: Long Call Butterfly Spread
Stock XYZ is trading at ₹100. You execute:
Action
Type
Strike
Premium
Buy 1
Call
₹90
₹12
Sell 2
Call
₹100
₹6 each (₹12 total)
Buy 1
Call
₹110
₹2
Net premium paid = ₹12 – ₹12 + ₹2 = ₹2
This ₹2 is the maximum loss.
Maximum profit occurs if the stock closes at ₹100.
Payoff Zones
Maximum profit: ₹8 (spread ₹10 – premium ₹2), when price = ₹100
Maximum loss: ₹2 (premium paid), when price < ₹90 or > ₹110
Breakeven points:
Lower = ₹90 + ₹2 = ₹92
Upper = ₹110 – ₹2 = ₹108
Payoff Table
Price at Expiry
₹90 Call
₹100 Calls (x2)
₹110 Call
Net P/L
85
0
0
0
–2
90
0
0
0
–2
92
2
0
0
0
95
5
–10
0
–2
100
10
–20
0
8
105
15
–30
0
–2
108
18
–36
0
0
110
20
–40
0
–2
115
25
–50
5
–2
Strategy Summary
Feature
Description
Strategy type
Neutral / range-bound
Best use case
Low volatility, expiry-week setups
Legs
4 (buy–sell–sell–buy)
Max profit
Limited, at middle strike
Max loss
Limited, net premium paid
Breakevens
Tight, middle ± premium
Ideal for
Pinning, event containment, expiry
When to Use
When you expect price to stay near a certain level
When no major events are expected
When you want low-cost, low-risk expiry trading
When volatility is high but expected to drop (IV crush)
When time decay is expected to help near expiry
Butterfly Spread vs Iron Condor
Feature
Butterfly Spread
Iron Condor
Strike range
3 (tight)
4 (wider)
Risk/reward
Smaller risk, higher reward ratio
Wider profit zone, lower reward
Breakevens
Narrow, less forgiving
Wider, more forgiving
Best use case
Exact pin expectation
General sideways view
Risks
Narrow profit zone, losses outside breakevens
Execution complexity (3 strikes, 4 legs)
Works best close to expiry, less effective earlier
Real-World Example
Nifty is at 22,000. You set up:
Buy 21,900 CE
Sell 2 × 22,000 CE
Buy 22,100 CE
If Nifty closes near 22,000, you maximize gains. If it moves outside 21,900–22,100, the loss is capped at the premium.
Final Takeaways
Best strategy for quiet markets and expiry weeks
Excellent risk-to-reward profile
Sweet spot is at the middle strike
Losses are capped and known upfront
Works well for consolidation or pinning strategies