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OPTIONS STRATEGIES·SHORT VOL·3 LEGS

Call butterfly

Buy a lower call, sell two middle calls, buy an upper call (1:2:1). Cheap directional play that profits if the stock pins the middle strike at expiry.

INPUTS
Underlying price
$
Centers the payoff chart and computes P&L at this price.
LEGS
Long lower call
Type
Side
Strike
$
Qty
Premium
$
Short middle calls
Type
Side
Strike
$
Qty
Premium
$
Long upper call
Type
Side
Strike
$
Qty
Premium
$
RESULT
BE $95.50BE $104.50spot $100.00
$60.003 strikes$140.00
P&L at current spot (expiry)
+$450
Net debit−$50
Max profit+$450
Max loss−$50
Breakevens$95.50 · $104.50
Risk / reward9.00 : 1
RISK PROFILE
Max profit
Wing width × 100 − net debit
Max loss
Net debit paid
Breakeven
Lower + (debit ÷ 100), Upper − (debit ÷ 100)
HOW IT WORKS

How a call butterfly works

A call butterfly buys one lower-strike call, sells two middle-strike calls, and buys one higher-strike call, all in the same expiry with equal spacing. The result is a cheap, defined-risk position that pays best if the stock finishes exactly at the middle strike.

Think of it as two vertical spreads back to back: a bull call spread from the lower to the middle strike, and a bear call spread from the middle to the upper. The two short calls at the centre are shared, which is what makes the whole structure cost so little.

The appeal is the ratio. A butterfly often risks a small debit for several times that in potential profit, because it pays out only in a narrow window. The catch is precisely that narrowness — most of the time the stock finishes somewhere else and the debit is lost.

WORKED EXAMPLE

A worked example

XYZ trades at $100 and you expect it to be near $100 in 30 days. You buy the $95 call for $6.00, sell two $100 calls for $3.00 each, and buy the $105 call for $1.50.

Net debit
$6.00 − $6.00 + $1.50 = $1.50 × 100 = $150 (max loss)
Max profit
($5 wing − $1.50) × 100 = $350, at exactly $100
Breakevens
$96.50 and $103.50
At expiry, XYZ = $100
$95 call worth $5, two $100 calls worthless → +$350
At expiry, XYZ ≤ $95 or ≥ $105
All legs net to zero, −$150

Risking $150 to make $350 is attractive, but the full payout needs a $100 print exactly. The honest way to read a butterfly is as a low-probability, high-ratio bet on a specific price, not a reliable income structure.

FIT

When a call butterfly fits — and when it doesn't

Consider it when
  • You have a specific price target and a date, not just a direction.
  • You want a large potential ratio for a small, fixed outlay.
  • Implied volatility is elevated, which cheapens the debit on an at-the-money butterfly.
Think twice when
  • You expect a trend or a large move. Butterflies are the wrong shape for anything directional.
  • The underlying is illiquid — four legs means four bid-ask crossings each way, which can exceed the debit itself.
  • You are treating it as a high-probability trade. Most butterflies expire worthless by design.
FAQ

Common questions

What is the maximum profit on a call butterfly?

(Wing width − net debit) × 100, at exactly the middle strike. A $95/$100/$105 butterfly opened for $1.50 pays a maximum of $350 per contract.

What is the maximum loss?

The net debit paid, incurred anywhere at or outside the two outer strikes at expiry.

Where are the breakevens?

Lower strike + debit, and upper strike − debit. With a $1.50 debit on $95/$100/$105 strikes, breakevens are $96.50 and $103.50.

Is a call butterfly different from a put butterfly?

The payoff diagram is effectively identical at the same strikes and expiry. The choice usually comes down to which chain has better liquidity and tighter spreads.

RELATED STRATEGIES
Put butterfly
Pin risk · Long 1 / Short 2 / Long 1 across three put strikes.
Iron butterfly
Short volatility · Pin risk play, max profit at the short strike.
Iron condor
Neutral · Defined-risk credit, profits when stock stays in range.
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