Long Butterfly Spread Explained: Risk $100 to Make $400
The long butterfly spread explained step by step: buy one lower call, sell two at the middle strike, buy one higher call. A worked XYZ example ($100) with a $100 debit, max profit $400, breakevens $96 and $104, three expiration scenarios and how time, volatility and trade management shape the result
Options education. Examples use a hypothetical stock (XYZ) and illustrative premiums; they explain the mechanics, not a recommendation.
A long butterfly spread lets you risk a small, fixed amount for a much larger potential profit, on one condition: the stock has to finish close to the price you pick. Pick the landing spot, pay a small debit, and let time do the work.
1. Three strikes, one target
| Leg | What you do | Role |
|---|---|---|
| Buy 1 | lower call | the lower wing |
| Sell 2 | middle calls | the body: your target |
| Buy 1 | upper call | the upper wing |
Same expiration, equal distance between strikes. A long butterfly is a bull call spread plus a bear call spread that share the middle strike. You pay a debit to open it, and that debit is your maximum loss.
2. Worked example: XYZ at $100
| Leg | Premium |
|---|---|
| Buy 1 × 95 call (lower wing) | −$6.50 |
| Sell 2 × 100 calls (body / target) | +$7.00 (2 × $3.50) |
| Buy 1 × 105 call (upper wing) | −$1.50 |
| Net debit | $1.00 per share = $100 per contract |
−6.50 + 7.00 − 1.50 = −1.00. The trade pays the most if XYZ finishes right at $100.
3. Max profit, max loss, breakevens
| Formula | Result | |
|---|---|---|
| Max profit (stock exactly at 100) | (wing width − debit) × 100 = (5 − 1) × 100 | $400 |
| Max loss (below 95 or above 105) | the debit | $100 |
| Lower breakeven | lower strike + debit = 95 + 1 | $96 |
| Upper breakeven | upper strike − debit = 105 − 1 | $104 |
Risk $1 to make up to $4, but the landing zone is narrow.
4. The payoff at expiration
The profit graph looks like a tent: a flat loss of −$100 below 95 and above 105, a profit zone between the breakevens of $96 and $104, and a sharp peak of +$400 at $100. The risk is small and defined on both sides.
5. Three outcomes at expiration
- A. Lands at $100: the 95 call is worth $5 and everything else expires worthless. 5 − 1 = +$400.
- B. Finishes at $98: the 95 call is worth $3, still inside the tent. 3 − 1 = +$200.
- C. Rallies to $110: all calls are in the money and cancel each other out. You lose only the debit: −$100.
Near the target: great. Close to it: good. Far away: you lose only the debit.
6. Time and volatility
- Time: most of the profit comes late, in the final weeks. Thirty days before expiration the curve is much flatter than the tent at expiration.
- Volatility: the butterfly likes a calm market and falling implied volatility.
- Mindset: it is a patient trade. Let time do the work.
7. When does it make sense?
- Outlook: calm, near a price, with no big move expected.
- Target: a clear landing level, for example a level the price keeps returning to.
- Risk: small and defined. The worst case is the debit.
8. Setting one up: checklist
- Pick your target price. It becomes the middle strike.
- Choose the wing width: wider means a bigger zone and a higher cost.
- Buy 1 below, sell 2 at the target, buy 1 above.
- Check the debit: max loss = debit; max profit = width − debit.
- Choose an expiration a few weeks out, so time decay can help.
9. Managing the trade
- Take profits: close at a part of the max profit. Don't wait for a perfect landing.
- Price drifts away: if it is far from the target, decide early to close or adjust. No miracles.
- Final days: the position becomes very sensitive to small moves. Watch for assignment on the short calls, and close in-the-money short calls before expiration becomes a problem.
10. Pros and cons
| Pros | Cons |
|---|---|
| Small, defined risk | Narrow profit zone |
| Reward can be several times the risk | Full profit is rare |
| Cheap to open | Most gains come late |
| Benefits from calm and time decay |
The long butterfly in four lines
- Buy 1 lower, sell 2 in the middle, buy 1 higher.
- It is a debit trade: the debit is your max loss.
- Max profit = wing width − debit, at the middle strike.
- Aim at your target, give it time, take profits early.
Related: Broken Wing Butterfly Explained: No Upside Risk, Paid to Open, the version that skips a strike on one side to open for a credit.
Educational purposes only, not financial advice. Options involve risk and are not suitable for all investors.