Call Butterfly: how the position works

Buy one call below, sell two at the middle, buy one above, all equally spaced. It costs a small debit and pays its maximum if the underlying finishes exactly at the middle strike. The appeal is the ratio: a butterfly frequently risks one dollar to make four or five, which buys a very cheap way to express a precise view about where something settles.

Market view: Neutral — pinned
Opened for: Debit
Maximum profit: (K₂ − K₁) − net debit, at exactly K₂ at expiry.
Maximum loss: The net debit paid, at or beyond either outer strike.
Breakeven: K₁ + net debit below, and K₃ − net debit above.

How it is built

Buy 1 call at K₁
Sell 2 calls at K₂
Buy 1 call at K₃, with K₂ − K₁ = K₃ − K₂, same expiry

All figures above are quoted per share and settle at expiry. A standard equity option covers 100 shares, so multiply by 100 for a single contract.

Before expiry: the Greeks

Near-zero delta when centred on the market. Short vega and positive theta, and both grow sharply as expiry nears — a butterfly is worth very little until the last week or two, then converges quickly toward its terminal payoff. That late convergence is the practical fact about trading it: entering early costs little and does little, and most of the value appears at the end.

When to use it

When you have a specific price target and expiry in mind and want the cheapest structure that pays for being exactly right. It is also a common way to express a view about where an index pins into a monthly expiry, where large open interest at a strike can be self-reinforcing.

What goes wrong

It is rarely worth its maximum. The peak requires an exact finish, and realistic outcomes pay a fraction of it.
Three strikes and four contracts make it fiddly to execute; legging in on a moving market often costs more than the edge.
The position does very little until close to expiry, so it demands patience and is easy to abandon early at a small loss.

A worked example

SPY at 580, 21 days out. Buy the 570 call, sell two 580 calls, buy the 590 call, for a net 2.10 debit.

Net debit paid: $2.10 per share — $210 for one butterfly
Wing width: $10.00
Maximum profit: $790 ((10 − 2.10) × 100), only at exactly 580
Maximum loss: $210, at or beyond 570 or 590
Breakevens: $572.10 and $587.90

Commissions, exchange fees, financing and the bid/ask spread are excluded. On a multi-leg position the spread is usually the largest of these.

Common questions

Why use calls rather than puts?

At the same strikes the two are equivalent by put-call parity and should price identically. In practice pick whichever side is out of the money, because out-of-the-money options are more liquid and the spreads are tighter.

Related strategies

Educational only. This page explains how a structure behaves; it is not a recommendation to trade it. Options and futures carry substantial risk, and short and leveraged positions can lose more than the amount originally invested.