Options Academy
Butterfly Spreads 101: The Defined-Risk Neutral Trade
A butterfly spread is the classic "neutral" options play: limited risk on both sides and max profit right at the middle strike.
The Structure (1-2-1)
A butterfly spread combines a bull spread and a bear spread using the same expiration date.
Buy 1 lower strike call, Sell 2 middle strike calls, Buy 1 higher strike call.
Risk is limited to the net debit you pay. Profit is limited, too, and peaks when the stock finishes at the middle strike.
Why Risk Is Limited
At very low prices, all calls expire worthless and your loss is the original debit.
At very high prices, the two short calls are offset by the two long calls (one lower strike, one higher strike).
That creates a capped loss equal to the debit, not an unlimited loss.
Max Loss
Net debit paid
Max Profit
Strike spacing - net debit
Profit Peak
Middle strike
Profit Range
Low strike + debit to High strike - debit
Example: XYZ 50/60/70 Butterfly
Stock XYZ is at $60.
Buy July 50 call for $12, sell two July 60 calls for $6 each, buy July 70 call for $3.
Net Debit: $3.00 ($12 - $12 + $3) = $300.
This $300 is both the investment and the max loss.
Lower Strike (Buy)
$50 Call
Middle Strike (Sell x2)
$60 Calls
Upper Strike (Buy)
$70 Call
Net Debit (Max Loss)
$3.00
Profit Range at Expiration
The butterfly earns money only inside a range. In this example, the profit range is $53 to $67.
Outside that range, the spread loses money, but the loss is capped at $300.
Profit Range Formula: Low strike + debit to High strike - debit.
With 50/60/70 and a $3 debit, the range is 50 + 3 to 70 - 3.
Butterfly Spread P/L at Expiration
- profit
Expiration Outcomes (Quick Table)
This table mirrors the 50/60/70 example and shows how profits peak at the middle strike.
It also shows why the P/L is symmetric when strikes are evenly spaced.
Stock $50
-$300
Stock $53
$0
Stock $56
+$300
Stock $60
+$700
Stock $64
+$300
Stock $67
$0
Stock $70
-$300
Key takeaways
- Butterfly spreads use a 1-2-1 call structure with the same expiration.
- Max loss is the net debit paid; max profit occurs at the middle strike.
- Profit exists only inside a defined range around the middle strike.
- This is a neutral strategy: you want the stock to stay near the center.
Series
Butterfly Spread Masterclass
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