Question 1

What is a long butterfly spread and when do you use it?

Accepted Answer

A long butterfly is a three-strike options structure built from four contracts: you buy one call at a lower strike, sell two calls at a middle strike, and buy one call at a higher strike, with the two wings equally spaced around the middle. It costs a small net debit to put on, and that debit is the most you can lose. The payoff is a tent: it is worthless at expiry unless price lands near the middle strike, where it pays the most. You use it when you have a specific price target and expect the market to sit still — you think an asset will pin a level and volatility will fall. It is the opposite trade to a straddle, which pays off when price moves a lot; a butterfly pays off when price goes nowhere and finishes on your number. Because the risk is capped at the debit and the reward can be several times that, it is a cheap, defined-risk way to bet on a pin.

Question 2

How do I calculate the maximum profit and loss on a butterfly?

Accepted Answer

The maximum loss is simply the net debit you paid to open the spread — you lose the whole debit if price finishes at or beyond either outer strike, where the structure expires worthless. The maximum profit happens at expiry exactly at the middle strike, and it equals the wing width (the distance between the middle strike and an outer strike) minus the debit. So a butterfly with 10,000-wide wings bought for a 2,500 debit can lose at most 2,500 and make at most 7,500 — a reward-to-risk ratio of three to one. The catch is that the maximum profit only lands at one precise price; realistically you capture a slice of it inside the break-even band, not the full tent. This calculator prints both the peak profit at the middle strike and the reward-to-risk ratio so you can see the trade-off between a cheap entry and a narrow target.

Question 3

What are the break-even prices on a butterfly spread?

Accepted Answer

A long butterfly has two break-evens, one on each side of the middle strike, and you only profit if price finishes between them. The lower break-even is the lower strike plus the debit; the upper break-even is the upper strike minus the debit. Between those two prices the structure returns more than it cost; outside them you lose part or all of the debit. The width of that profitable band is what really matters — a butterfly with a tiny debit has a wide band and forgiving break-evens, while one with a rich debit has a narrow band that price has to thread precisely. This calculator solves both break-evens for you and shades the payoff table so you can see exactly which settlement prices leave you in profit.

Question 4

What is the probability a butterfly finishes in profit?

Accepted Answer

The probability of profit is the chance that price at expiry lands inside the two break-evens. This calculator estimates it from a lognormal move: it takes your annualised volatility and days to expiry to work out the one-standard-deviation range, then measures how much of that distribution falls between the lower and upper break-even. For a butterfly the number is usually low — often 25% to 40% — because the profitable band is narrow by design. That is the whole nature of the trade: you accept a low chance of winning in exchange for a large payoff multiple if price does pin your strike. A butterfly with a low probability of profit but a five-to-one payoff can still be a good expected-value bet; one with a rich debit that both lowers the payoff and narrows the band rarely is. Reading the probability next to the reward-to-risk ratio is how you tell the two apart.

Butterfly Spread Calculator

Payoff across settlement prices

A cheap bet that price goes nowhere

The math