Call Butterfly

Two calls sold at the middle strike against one bought above and one below, evenly spaced: a debit structure whose gain peaks if the underlying finishes at the middle strike.

Also called Long call butterfly, Call fly

Outlook

Neutral

Family

Ratio

Level

Advanced

Legs

3 legs

Expirations

1 expiration

Opens for

Debit

Maximum profit

Limited

Maximum loss

Limited

Legs at the reference strikes this page's diagrams are drawn from

Leg	Side	Contract	Ratio	How the strike is chosen
B	Short	Call 100	2	At the money
A	Long	Call 95	1	5.00 points further in the money than B
C	Long	Call 105	1	5.00 points further out of the money than B

What it is

Three strikes, evenly spaced, all calls, all in one expiration: one bought at A, two sold at B, one bought at C. The ratio is 1–2–1, and the even spacing is what makes the two wings cancel outside the structure.

Read another way it is two vertical spreads back to back: a bull call spread from A to B and a bear call spread from B to C. That is often the easier way to see why the payoff has the shape it does.

The payoff

At expiration

A narrow tent: flat at a small loss on both sides, rising to a peak at the middle strike B.

• Below A — everything expires worthless and the debit is lost.
• Between A and B — the long call at A is in the money and the position climbs toward its peak.
• At B — the maximum. The long A call is worth B − A, the two short calls are worthless, and the result is that width less the debit.
• Between B and C — the two short calls are in the money and give back what the long A call gains, so the position falls at twice the rate it rose.
• Above C — the long C call catches the second short one. Everything is fixed at the maximum loss again.

Maximum loss is the debit, at both ends. Maximum gain is (B − A) less the debit, at one price.

How it behaves before expiration

Today, before expiration

Today's value is an almost flat line far below the tent's peak, with the peak barely visible.

Almost nothing happens until the end. Before expiry the structure is close to flat: three legs’ time values very nearly cancel, and the peak at B only appears in the final days as the short legs lose their extrinsic value faster than the wings lose theirs.

A butterfly bought early and judged after a week will usually look as though it has done nothing. That is the structure working as designed, not a failure of the view.

The Greeks

Delta is small throughout and changes sign at B.

Gamma is negative at B and positive at the wings — the mirror of what the payoff shows.

Theta is positive when the underlying is near B and negative when it is near a wing. Time helps only if the price is where the position wants it.

Vega is negative near B: a rise in implied volatility flattens the peak, because it is the short at-the-money legs that gain most from it.

Where it lives in the volatility environment

Practitioners describe a butterfly as a cheap way to express a view about where the underlying will finish rather than which way it will go, and generally note that the debit is smaller when implied volatility is high relative to the width — the sold body is then worth more against the bought wings.

What can go wrong

• The peak is one price. Anything else gives back part of the gain, and the fall from B to C is twice as steep as the climb from A to B.
• It needs time to be right. Most of the value appears at the very end, so an early exit rarely realises much of the maximum.
• Pin risk at B, doubled. Two short contracts sit there, and partial assignment on one of them leaves an unbalanced structure.
• Three strikes, four contracts, six crossings. The cost of getting in and out is a large fraction of a small debit.
• The wings must be equidistant. A structure whose spacing is uneven is not a butterfly; it is a broken wing, with a different risk profile.

Building it in Option Panel

Open Build Strategy and pick Call Butterfly. The body strike B is chosen first; each wing is an offset from it, and the builder applies the same offset on both sides unless told otherwise. The 2:1 ratio on the body is part of the definition and is not editable per leg.

Back to the encyclopaedia · What-if analysis in the docs

Related strategies

• Put Butterfly — the same payoff built from puts.
• Iron Butterfly — the same shape inverted, opened for a credit from calls and puts together.
• Call Broken Wing — a butterfly with one wing moved further out, which changes both the cost and the risk.