A butterfly spread is a three-strike option position with limited risk and limited reward. The classic long call butterfly uses four options of the same expiry: buy one call at a lower strike, sell two calls at a middle strike, and buy one call at a higher strike, with the same distance between each strike. The middle is the body, the outer strikes are the wings, which is where the name comes from.
It is a bet that the price will be close to a target at expiry. It needs no big move and has no open-ended risk, which makes it popular with traders who want a precise, cheap view. If the payoff shapes below are unfamiliar, read how to read payoff diagrams first.
Long call butterfly = +1 lower call, −2 middle calls, +1 upper call
A worked example: NIFTY 24,800 / 25,000 / 25,200
NIFTY is at 25,000 with three days to expiry. You build a butterfly centred on 25,000:
- Buy one 24,800 call at ₹310
- Sell two 25,000 calls at ₹180 each (₹360 received)
- Buy one 25,200 call at ₹90
Net cost: 310 + 90 − 360 = ₹40 debit. That is the maximum loss. The maximum profit is the wing width minus the debit: 200 − 40 = ₹160, reached only if NIFTY expires exactly at 25,000.
| NIFTY at expiry | 24,800 call | Two 25,000 calls | 25,200 call | Profit per unit | Per lot of 75 |
|---|---|---|---|---|---|
| 24,700 | 0 | 0 | 0 | −40 | −₹3,000 |
| 24,840 | 40 | 0 | 0 | 0 | ₹0 |
| 24,900 | 100 | 0 | 0 | +60 | +₹4,500 |
| 25,000 | 200 | 0 | 0 | +160 | +₹12,000 |
| 25,100 | 300 | −200 | 0 | +60 | +₹4,500 |
| 25,160 | 360 | −320 | 0 | 0 | ₹0 |
| 25,300 | 500 | −600 | 100 | −40 | −₹3,000 |
The lot size of 75 is an example for the arithmetic; check the current figure on NSE. The break-evens are the lower strike plus the debit (24,840) and the upper strike minus the debit (25,160). Outside the wings, every option either expires worthless or the gains and losses cancel, so the loss is fixed at the debit.
Why the reward looks so good, and the catch
Risking ₹40 to make ₹160 is a 1:4 risk-reward. That sounds generous until you look at the probability. NIFTY has to land within a 320-point zone to make any money, and very near 25,000 to make the full amount. On most expiries it will finish somewhere in the zone or outside it, and the typical result is a fraction of the maximum or a small loss.
The pricing is fair because the market prices these odds. Butterflies are not a free lunch; they are a way to express a precise view cheaply.
Choosing the centre: expected move and open interest
The body should sit where you think the price will finish. Two pieces of market information help. The first is the expected move, from today's ATM straddle:
A butterfly whose wings are much narrower than this range needs NIFTY to stay unusually still. Wider wings raise the debit but widen the profit zone.
The second is where option writers are positioned. Large open interest at a strike can act like a magnet into expiry, an idea related to max pain:
Look for the strikes with the heaviest call and put open interest and how they have changed today. A butterfly centred between strong call and put walls is aligned with where sellers want the price to settle, though walls can shift or break on a trending day.
How the butterfly behaves over time
Early in its life, a butterfly barely moves: its value stays near the debit because all four options still have plenty of time value. As expiry nears, if NIFTY is near the body, the two sold calls decay faster than the bought wings and the butterfly's value climbs toward its maximum. This makes butterflies a common expiry-week trade.
The flip side: if the price moves away from the body in the last days, the value falls quickly. And because the full profit only appears at the final settlement, many traders close a butterfly when it reaches a share of the maximum, such as half, instead of waiting for a perfect pin.
Variations
- Put butterfly. The same structure with puts. At the same strikes, the expiry payoff is identical; prices may differ slightly because of liquidity.
- Iron butterfly. Sell the ATM call and put, buy a far call and far put. It opens for a credit rather than a debit but has the same payoff shape. See the iron butterfly guide.
- Broken-wing butterfly. One wing is further away than the other, for example 24,800 / 25,000 / 25,300. It can be opened for very little or even a credit, removing risk on one side and adding a little on the other.
- Condor. Two different middle strikes instead of one, giving a flat top instead of a peak: lower maximum profit, wider zone. The iron condor is its credit version.
Butterfly or another neutral trade?
A butterfly is one of several ways to bet on a quiet market. Compared side by side on the same NIFTY expiry:
| Trade | Cost | Profit zone | Worst case |
|---|---|---|---|
| Short straddle | Credit, large | Wide, peaks at the strike | Unlimited loss |
| Short strangle | Credit, smaller | Wider, flat between strikes | Unlimited loss |
| Iron condor | Credit, smaller still | Flat between short strikes | Capped |
| Long butterfly | Small debit | Narrow, peaks at the middle | The debit |
The butterfly risks the least money and needs the least margin, but it also has the narrowest target. A short straddle collects much more and pays across a wider range, at the cost of open-ended risk. Neither is better; they are different trade-offs between how often you win, how much, and how badly a surprise can hurt.
Some traders combine the ideas: they open a short straddle and later buy wings, turning it into an iron butterfly once the premium has decayed, which locks in a capped worst case for the rest of the expiry.
Practical points and mistakes
- Four legs, four costs. Brokerage, taxes and the bid-ask spread on four options can be a large part of a ₹40 debit. Use liquid strikes and limit orders.
- Legging in. Entering one leg at a time to get better prices exposes you to a move between orders. Most traders enter the whole structure at once.
- Expecting the maximum. Planning around a perfect finish at the middle strike sets up disappointment; plan around a realistic partial profit.
- Settlement surprises. Index options settle in cash at the official closing value, which can differ from the last price you saw. Check how your exchange calculates it.
Try different centres and wing widths in the strategy builder to see how the cost, the peak and the break-evens change together.