LONG CALL BUTTERFLY
Overview
Buy a lower-strike call, sell two middle-strike calls, and buy a higher-strike call — same expiration with equal wing widths. You pay a small debit; maximum profit occurs when the stock pins exactly at the middle strike at expiration. The tent-shaped payoff rewards precise price prediction at minimal cost.
What it does
You're combining a bull call spread and a bear call spread that share the same middle (short) strikes. The two short calls fund most of the cost of the two long wings, making the trade extremely cheap. You profit only if the stock pins near your target price — but the risk/reward ratio can be exceptional even with low probability of hitting the perfect pin.
Structure
buy 1 call + sell 2 calls + buy 1 call
Setup
- 1.Buy 1 Call at the lower wing strike.
- 2.Sell 2 Calls at the middle strike.
- 3.Buy 1 Call at the upper wing strike.
- 4.Equal distance between strikes; same expiration.
Max profit
(Wing Width − Net Debit) × 100. E.g., SPY: ($5 − $0.70) × 100 = $430. Achieved if SPY closes at the middle strike.
Max loss
Net Debit Paid. E.g., $0.70 × 100 = $70.
Breakeven
Lower Strike + Net Debit and Upper Strike − Net Debit. E.g., $425.70 and $434.30.
When to use
When you expect minimal price movement and want to target a specific expiration price with very low cost and fully defined risk.
When to avoid
When you expect a large move in either direction — the position profits only within a narrow band.
Example trade
Stock: SPY at $430 Buy 1 SPY $425 Call Sell 2 SPY $430 Calls Buy 1 SPY $435 Call Net Debit: $0.70 ($70) Expiration: 21 days Max Profit: ($5 - $0.70) × 100 = $430 (if SPY pins at $430) Max Loss: $70 (the debit paid) BreakevenS: $425.70 and $434.30 Risk/reward: Risk $70 to potentially make $430 — a 6:1 ratio
Common mistakes
- ×Using unequal wing widths — always keep both sides equidistant from the middle strike.
- ×Entering too early — most profit accrues in the final 7–14 days near expiration.
- ×Expecting a perfect pin — you have a profit zone, not just a single winning price point.
- ×Ignoring transaction costs — four legs on a small debit means commissions can be significant.
- ×Entering when IV is very low — the short calls collect too little to meaningfully offset the long wings.
FAQ
What is the risk/reward on a butterfly?
Maximum loss is the debit paid (e.g., $70). Maximum profit is the wing width minus the debit (e.g., $430). The ratio is attractive, but probability of hitting max profit is low.
When should I close a butterfly?
Many traders close at 25–50% of maximum profit to avoid the risk of the stock moving out of the profit zone near expiration.