What is a long butterfly?
A long butterfly uses three strikes in one expiration, all calls or all puts, in a 1-2-1 ratio. You buy the outer two and sell two at the middle.
You pay a debit, and that debit is your entire risk. It is the cheapest way to express a precise view about where a stock will finish.
When traders use it
Traders buy butterflies when they can name a price and want a large payout ratio for a small outlay.
- You expect the stock to settle at a level, often a round number or a pin.
- You want a defined-risk position that costs very little.
- Implied volatility is high, making the two short middles worth selling.
The P/L shape
The payoff is a tent: zero outside the wings, rising to a peak at the middle strike.
Worked example. XYZ trades at $100. You buy the $95 call, sell two $100 calls, and buy the $105 call for a net debit of $1.20, or $120.
- Max profit
- $380 — the $500 half-width minus the $120 debit, at exactly $100
- Max loss
- $120 — the debit, outside $95 to $105
- Breakevens
- $96.20 and $103.80
Risking $120 to make $380 is a better ratio than most defined-risk trades offer. The peak also needs a close at exactly $100, so the full payout is rare.
Greeks and time decay
Delta is near zero at the middle strike, positive below it and negative above. The position is short gamma near the middle and long gamma at the wings.
Theta is positive once price is near the middle strike, because the two shorts decay faster than the wings. It is negative when price is out near a wing. Vega is negative near the middle: falling implied volatility tightens the distribution around your peak, which is what you want.
Build it in DeltaForm
- Open the builder and choose the symbol and expiration.
- Add a long call at the lower strike.
- Add two short calls at the middle strike.
- Add a long call at the upper strike, equally spaced.
- Read the debit and both breakevens, then step the date forward to watch the tent sharpen.
Frequently asked questions
Calls or puts for a butterfly?
Either. With the same three strikes and expiration the payoff is effectively identical. Pick the side with the better fills, usually the out-of-the-money one.
How is this different from an iron butterfly?
A long butterfly is a debit and pays at the middle. An iron butterfly is a credit and also pays at the middle. Same shape, opposite cash flow, and different early-assignment exposure.
Why does the value barely move at first?
A butterfly is slow far from expiration, because all three strikes still hold time value. Most of the payout appears in the final week or two. Step the date forward in the model and you will see it.