Butterfly profit and loss
Definition · Level 3 · Spreads & short options
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For a long butterfly with equal wings: the most you can lose is the debit, and the most you can make is the wing width minus the debit, at the body.
Example
95/100/105 call fly for 1.30 → lose $130 at most, make $370 at most.
Where Tradecraft teaches it
Level 3 · Spreads & short options, in the lesson “Butterflies: betting on a narrow range”: Body and wings, the lottery-like payoff, the iron butterfly and the short butterfly.
Related terms
- BodyThe middle strike of a butterfly, short in a long fly: where a long fly earns the most at expiration.
- Iron butterflyCredit tent: sell an at-the-money straddle and buy an out-of-the-money strangle as protection (sell 100P + 100C, buy 95P + 105C).
- Long ButterflyBuy one low strike, sell two middle strikes, buy one high strike (1×2×1).
- PinningAn observed, not guaranteed, tendency of a stock to settle near a strike with very large open interest into expiration, often put down to option…
- Short ButterflyThe reverse fly: sell the outer strikes, buy two of the middle.
- Back-spread danger zoneWhere a back spread loses the most at expiry: the stock sitting at the long strike.