Strategy · 5 min read
The Butterfly Spread strategy
A long butterfly buys one lower strike, sells two middle (ATM) strikes, and buys one higher strike — all calls or all puts. It is a low-cost, defined-risk debit structure that pays off most when the underlying pins the centre strike at expiry.
Structure
Three strikes, symmetric around the centre:
- Buy 1 lower-strike option (wing)
- Sell 2 ATM options (body)
- Buy 1 higher-strike option (wing)
Payoff and variants
Max profit occurs at the centre strike; max loss is the small debit paid. Variants include call/put butterflies, credit (reverse) butterflies that profit on a big move, and iron butterflies built from both calls and puts. KXalgo supports these as entry types with a configurable wing width.
FAQ
Why trade a butterfly?
It is a cheap, defined-risk way to bet that the underlying will finish near a specific level by expiry, with a high reward-to-cost ratio if it pins.
What is the main risk?
The underlying moving away from the centre strike — though the loss is limited to the small debit paid.
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