A butterfly spread is a three-legged options strategy that makes money when a stock stays near the middle strike. It's cheap to enter, limited in risk, and perfect for traders who want income without the capital burden of strangles or condors.

The name comes from the payoff diagram—when drawn, it looks like butterfly wings. Profit sits in the middle, losses are defined on both sides.

Butterfly Spread Mechanics: Three Strikes, One Profit Zone

A long call butterfly involves three call strikes:

Example (XYZ at $100):

Buy 1 call at 95 strike (ITM)
Sell 2 calls at 100 strike (ATM)
Buy 1 call at 105 strike (OTM)

Cost calculation:

Buy 95 call: -$6.00
Sell 100 calls (2×): +$3.00 each = +$6.00
Buy 105 call: +$0.50
Net cost: $6.00 - $6.00 + $0.50 = $0.50 per contract (extremely cheap!)

Risk and profit:

Max profit: $5.00 - $0.50 cost = $4.50 (if stock closes at 100)
Max loss: $0.50 (limited)
Break-even: $95.50 and $104.50
Profit zone: $95.50 to $104.50

The beauty: You're risking $50 per contract to make up to $450. That's a 9:1 reward-to-risk ratio.

Why Butterflies: Capital Efficiency and Defined Risk

Compare three strategies on $100 stock:

Strategy	Capital Required	Max Profit	Risk	Profit Zone
Strangle	$400	$160	$160	Wide (±$6)
Iron Condor	$200	$100	$100	Wider ($90-$110)
Butterfly	$50	$450	$50	Narrow ($95-$105)

Butterflies demand smaller capital and accept a narrower profit zone in exchange.

Long Call Butterfly vs Long Put Butterfly

Long Call Butterfly

Strikes: Buy low call, sell 2 middle calls, buy high call
Uses: Best when expecting modest upside (stock will rise, but not dramatically)
Entry: Bullish bias but want to profit from small movement
Cost: Usually cheap to very cheap (sometimes net credit!)
Max profit at: Higher middle strike (ITM at expiration)

Example setup on bullish stock:

XYZ at $100, trending up but consolidating
Buy 95 call, sell 100 calls (2×), buy 105 call
Cost: $0.50
You're betting: XYZ rises to $100-$105 by expiration
If XYZ closes at $103: Profit = $450 (9:1 payoff)
If XYZ stays at $100: Profit = $450 (max profit)
If XYZ drops to $95: Loss = -$50 (but you knew the risk)

Long Put Butterfly

Strikes: Buy low put, sell 2 middle puts, buy high put
Uses: Best when expecting modest downside (stock will fall, but not dramatically)
Entry: Bearish bias but want to profit from contained downside
Cost: Similar structure, same capital efficiency
Max profit at: Lower middle strike (ITM at expiration)

Example setup on bearish stock:

XYZ at $100, trending down but near support
Buy 95 put, sell 100 puts (2×), buy 105 put
Cost: $0.50
You're betting: XYZ falls to $95-$100 by expiration
If XYZ closes at $97: Profit = $450 (9:1 payoff)

DTE Considerations: When to Sell Butterflies

Butterflies profit most from theta decay and lack of movement. Your timing matters.

45 DTE Entry

Good for: Calm markets, earnings have passed
Premium: Moderate, costs $0.75-$1.25 typically
Theta decay: Gradual ($0.01-$0.02 per day)
Best practice: Hold 50-60% of the time, exit at 50% profit

30 DTE Entry

Good for: Sweet spot. Theta accelerates, not too risky
Premium: Cheaper, often $0.25-$0.75
Theta decay: Faster ($0.02-$0.04 per day)
Best practice: Hold through mid-expiration, exit when profit shows

14 DTE Entry

Good for: Fast theta decay, high probability of profit
Premium: Often very cheap ($0.10-$0.25)
Theta decay: Rapid ($0.05-$0.08 per day)
Risk: Movement risk is high. Stock is more likely to move past wings
Best practice: Only for calm stocks, be ready to adjust or close

7 DTE or Less

Avoid for Butterfly entry
Theta accelerates but so does price movement risk
Better to adjust an existing butterfly or exit

Butterfly Spreads vs Iron Condors: What's the Difference?

Both are neutral "body" trades. The key difference:

Aspect	Butterfly	Iron Condor
Strikes	3 total (buy, 2×sell, buy)	4 total (sell call, buy call, sell put, buy put)
Capital	Very low ($50-$100)	Moderate ($200-$300)
Risk	Defined, small	Defined, moderate
Max profit	Lower in dollars	Higher in dollars
Profit zone	Very narrow	Wider
Adjustment	Trickier (3 legs)	Easier (defined sides)

Use butterfly when: You want maximum capital efficiency, smallest risk, and precise price targeting.

Use iron condor when: You want more profit zone, larger max profit, and simpler management.

The Butterfly Adjustment Framework

Real stocks move. Your butterfly will be tested.

Scenario 1: Stock Moves Into One Wing

Stock approaches your 95 strike (lower buy)
Butterfly is still profitable if stock stays above 95
Action: Hold. Let theta decay work. Stock has to break your wing to hurt you
Timeline: No action needed unless break-through seems imminent

Scenario 2: Stock Approaches Your Wing Strike

Stock drops to $95.50 (at your lower wing), only $0.50 profit remains
Option A: Close the trade, lock in $50 profit, avoid last-minute risk
Option B: Adjust by rolling the wing lower (sell new 92/97 butterfly, collect $0.25)
- New max profit: $0.25 × 100 = $25 (smaller)
- But you've bought back your threatened wing

Scenario 3: Stock Breaks Through the Wing

Stock drops below $95 and threatened your lower leg
Your max loss ($50) is now likely
Action: Close the trade, take the loss, preserve capital

Iron Butterfly: Two-Sided Butterfly for Neutral Markets

An iron butterfly combines a bull call spread and bear put spread around one middle strike.

Setup (XYZ at $100):

Sell 100 call (ATM)
Buy 105 call (OTM)
Sell 100 put (ATM)
Buy 95 put (OTM)

Result:

Max profit: Width - Cost = $5 - $0.25 = $4.75 per contract
Max risk: Same as max profit (defined)
Capital: Similar to long butterfly but better profit zone

Iron butterflies are actually more efficient than long butterflies because you're selling the middle instead of buying it. Professional traders often prefer iron butterflies.

Strike Selection: The Middle Strike

The middle strike is your "home base"—where the stock should close for max profit.

Choosing the middle strike:

Technical support/resistance: Place middle strike at support or resistance level. Stock is more likely to respect it and bounce.
One standard deviation: Use ATM options (delta ~0.50). These are 1 standard deviation moves, statistically probable
Recent price clustering: If stock spent last 10 days around $100, middle strike at $100 makes sense

Real example:

XYZ support at $98, resistance at $102
ATM at $100
Middle strike: $100 (combines all factors)
Butterfly: Buy 95, sell 100 (2×), buy 105

Cost Basis and Break-Even Calculations

Long call butterfly:

Cost = (Cost of lower buy) - (2 × proceeds from middle sell) + (proceeds from higher buy)
Example: $6.00 - $6.00 + $0.50 = $0.50

Break-even points:

Lower: Lower strike + Net cost = $95 + $0.50 = $95.50
Upper: Higher strike - Net cost = $105 - $0.50 = $104.50

Outside these points, the butterfly loses money. Max loss = Net cost paid.

Tax Implications

Short vs long butterfly:

Long butterfly (net long premium): Qualifies for long-term capital gain treatment if held >1 year (rare for options)
Short positions: Treated as ordinary income (premium collected)
Close before assignment: Capital gain/loss on closing transaction

Best in tax-deferred accounts:

Roth IRA, Traditional IRA: Run unlimited butterflies without tax drag
No tracking of wash sales or long-term vs short-term gains
Simpler record-keeping

Butterfly Spread Strategy Workflow

Identify target: Find a stock in an uptrend (call butterfly) or downtrend (put butterfly) at support/resistance
Select DTE: 30-45 days preferred. 14-21 acceptable. 7 or less: too risky
Check IV: Low to normal IV preferred (high IV = expensive entry)
Build spread: Buy wing, sell 2 middle, buy wing
Enter: Place as single order (reduces slippage)
Manage: Hold through 50% profit, exit if threatened
Repeat: Stack multiple butterflies across different stocks

Portfolio example:

Run 4 butterflies per month at $30-50 profit each
Total monthly income: $120-200
Capital at risk across 4: ~$200-400
ROI: 30-100% per month (high, but capital is small)

Common Mistakes to Avoid

Buying butterflies right before earnings
- Earnings volatility can spike, pushing stock past your wings
- Stock movement risk > theta decay benefit
- Avoid 7-10 days before earnings
Choosing the wrong middle strike
- Place butterfly on resistance or support, not random price
- Stock moves away from middle = butterfly likely loses
- Use technical levels or standard deviation
Entering too wide
- Novice error: Buy 90/100/110 butterfly on $100 stock
- Too many ways to lose profit
- Keep wings narrow ($5 width max on $100 stock)
Forgetting bid-ask spreads
- 3 legs = 6 spreads to pay (buy and sell each leg)
- On illiquid stocks, spreads can be $0.50-$1.00
- Wipes out your profit
- Stick to liquid stocks (SPY, QQQ, major stocks)
Overcomplicating adjustments
- If butterfly is working, hold it
- Don't roll prematurely
- Let theta decay work its magic

Real Example: Apple Call Butterfly

Setup (Monday):

AAPL at $230
Recent high: $235, low: $220 (consolidating)
Sell 30-DTE butterfly:
- Buy 220 call: -$15.00
- Sell 230 calls (2×): +$10.00 each = +$20.00
- Buy 240 call: +$5.00
- Net cost: $0.00 (actually credit!)

Days 1-10:

AAPL stays $225-$232, consolidating
Theta decay erodes value
Butterfly now worth -$0.30 (profit of $30)

Day 15:

AAPL rallies to $238 (approaching upper wing)
Butterfly worth $1.50 (loss of -$150)
Decision: Close trade, take loss, preserve capital
Outcome: Loss of $150... but you knew risk was defined

Alternative if held:

Day 30: AAPL at $244
Butterfly max loss: $100 (worse than $150 loss taken)
Better to manage risk early

Within Cluster:

Butterfly Spread Options: Low-Cost Income Strategy Guide