Butterfly spread

A three-strike, defined-risk strategy that pays most if the stock lands right at the middle strike at expiration.

A butterfly spread is a three-strike position that profits when the underlying finishes near a specific price. You combine a bull spread and a bear spread so your maximum gain sits at the middle strike, while the outer strikes cap both your risk and your reward. It costs a small net premium to open, and that premium is the most you can lose.

In practice, traders reach for a butterfly when they expect a stock to stay pinned around one level, often into expiration or an event that they think is already priced in. A classic long call butterfly on a $100 stock might buy the 95 call, sell two 100 calls, and buy the 105 call. If the stock lands right at 100 at expiration, the payoff is at its best; drift too far either way and the trade simply expires worthless.

The common mistake is treating it as a high-probability income trade. The profit zone is narrow, and the position only reaches full value at expiration, so getting the direction right but the timing or level wrong still leaves you with little. Commissions on four legs also eat into an already small credit, so size and strike selection matter more than they look.

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