Butterfly Spread

Q: What is a butterfly spread?

A long butterfly buys one option at a lower strike, sells two at a middle strike and buys one at a higher strike, all calls or all puts, same expiry, with the strikes equally spaced. It is entered for a small net debit. The payoff at expiry is a tent: zero outside the outer strikes, rising to a maximum of the strike spacing minus the debit if the underlying finishes exactly at the middle strike.

Q: What are the break-even points of a butterfly?

Lower strike plus the net debit, and upper strike minus the net debit. Between those two levels the position makes money at expiry; outside them it loses the debit. The maximum profit is the distance between adjacent strikes minus the debit, earned only if the underlying expires at the middle strike.

Q: Why is a butterfly so cheap?

Because it is a bull spread and a bear spread that nearly cancel. The long lower-strike option and the two short middle-strike options form a bull call spread that costs money; the two short middle-strike options and the long upper-strike option form a bear call spread that brings money in. The difference is small, and in return the profit zone is narrow and the maximum is reached only at one price.

Q: What is the difference between a butterfly and an iron butterfly?

The same payoff built differently. A call or put butterfly uses one option type and is entered for a debit. An iron butterfly sells an at-the-money straddle and buys an out-of-the-money strangle around it, using both calls and puts, and is entered for a credit. The profit and loss profiles are identical apart from small pricing differences; the choice is usually about liquidity, margin and whether a credit or a debit suits the account.

Q: When is a butterfly used?

When a trader expects the underlying to be near a specific level at expiry and wants a defined-risk way to express it at low cost. On NIFTY it is a common expiry-day structure placed around a heavy open-interest strike or the max-pain level, since the tent is cheapest to buy on the final day when its odds are best known.

Four options, three strikes, one target price. The butterfly is the cheapest defined-risk way to say "the index will finish about here", and its payoff shows exactly what that bet costs and pays.

In short: a long butterfly buys one option at a lower strike, sells two at a middle strike and buys one at a higher strike, same type and expiry, equally spaced. It costs a small net debit, which is the maximum loss. At expiry it pays the strike spacing minus the debit if the underlying finishes at the middle strike, less as it moves away, and nothing beyond the outer strikes. It is a bull spread and a bear spread sharing the middle strike, which is why it is cheap and why its profit zone is narrow.

The intuition

Think of the butterfly as two vertical spreads back to back. The lower long option and one of the middle shorts make a bull spread that pays if the index rises to the middle strike. The other middle short and the upper long make a bear spread that pays if the index does not rise past the upper strike. Own both and you are paid most when the index lands exactly in between, which is the middle strike. Beyond either outer strike the two spreads cancel and the position is worth zero.

Because you are long one option at each wing and short two in the middle, the position is net short near the money and net long at the wings: short gamma and long theta when the index is near the middle strike, and the reverse when it drifts out. Its value is small and sluggish with weeks to go and comes alive only in the last days, when the tent sharpens.

Formula and worked example (illustrative numbers)

Net debit = premium(lower) − 2 × premium(middle) + premium(upper)
Maximum profit = strike spacing − net debit, at the middle strike
Maximum loss = net debit, outside the outer strikes
Break-evens = lower strike + debit, and upper strike − debit

Suppose NIFTY is at 24,000 with 27 days to expiry at 14% implied volatility, and you buy the 23,500 / 24,000 / 24,500 call butterfly:

Buy one 23,500 call	pay ₹746
Sell two 24,000 calls	receive ₹424 each, ₹848
Buy one 24,500 call	pay ₹207
Net debit	₹105 per unit, ₹6,825 per lot (65)
Maximum profit	₹395 per unit, ₹25,675 per lot, at 24,000
Break-evens	23,605 and 24,395

NIFTY at expiry	Spread value	P&L per lot
23,500 or below	0	−₹6,825
23,800	₹300	+₹12,675
24,000	₹500	+₹25,675
24,200	₹300	+₹12,675
24,500 or above	0	−₹6,825

The ratio is what draws traders: a maximum profit of nearly four times the debit. The catch is the shape. The profit zone is 790 points wide, 3.3% of the index, but the full payout needs a finish at one exact level, and anything near the wings returns only a fraction. Twenty-seven days out this position barely moves day to day; its value stays close to the debit until the final week, then swings sharply with every 100 points.

The butterfly's tent at expiry. The peak is reached only at the middle strike; the floor is the debit, on both sides.

Why it matters to an options trader

It prices a target. No other defined-risk structure pays so much for so little on a view that the index will be near one level; it is the natural expression of a pinning or max-pain thesis.
It is the standard expiry-day trade. On the final session a near-the-money NIFTY butterfly can cost a few rupees and pay the full spacing; traders place them around the heaviest open-interest strikes.
It is a defined-risk short straddle. The wings cap the loss that a naked short straddle leaves open, at the cost of a lower peak.
It isolates the final days. Because its value hardly moves until late, it is a way to hold a view on the expiry level without paying much theta or taking much directional risk along the way.

Common mistakes

Buying it weeks out and expecting it to respond. It will not. The tent only sharpens as expiry nears; early entries tie up capital for little movement.
Legging in across a moving market. Four legs filled at different times can turn a ₹105 debit into ₹200; use a single multi-leg order where the broker offers one.
Letting the middle shorts run into expiry on stock options. Stock options settle physically; a butterfly straddling the spot at expiry can leave an unintended delivery position. Close before the final session or use index options.
Choosing strikes by price rather than probability. A wide butterfly is dearer but forgiving; a tight one is cheap and almost never pays in full. Match the spacing to the move you expect, not the debit you like.
Ignoring the bid-ask on the wings. Out-of-the-money wings at 100-point spacing can have spreads of several rupees each; on a ₹105 debit that is a large share of the edge.

Indian-market specifics

On NIFTY, strikes are 50 points apart near the money, so a 50-wide butterfly is possible and a 100- or 200-wide one is common; the Tuesday weekly's final day is when butterflies trade most.
NSE's SPAN recognises the hedge: the two short middle calls are covered by the long wings, so margin is far below two naked shorts. Many brokers' basket-margin tools show the benefit before entry.
Index butterflies are cash-settled at 15:40 on expiry day; the final settlement price is the index close computed from the last 30 minutes, so a pin at the middle strike means the settlement price, not the last tick.
STT applies to the sale of the two middle options at 0.15% of premium from 1 April 2026, and to any in-the-money leg that is exercised, on its intrinsic value.

FAQ

What is a butterfly spread?

Long one lower strike, short two middle, long one upper, same type and expiry, for a small debit, paying most at the middle strike.

What are the break-even points of a butterfly?

Lower strike plus debit and upper strike minus debit.

Why is a butterfly so cheap?

It is a bull spread and a bear spread that nearly cancel; the narrow profit zone is the price of the low cost.

What is the difference between a butterfly and an iron butterfly?

Same payoff; the iron version uses a short straddle plus a long strangle and is entered for a credit.

When is a butterfly used?

For a view that the index will finish near one level, especially on expiry day around a heavy open-interest or max-pain strike.

Where the tent should go

The max-pain page shows the strike at which option holders lose most for the current expiry, and the NIFTY option-chain page shows the open-interest walls around it. In the app, the Max Pain Reliability page tracks how closely past expiries settled to the max-pain strike, which is the usual target for an expiry butterfly.

Max pain NIFTY option chain

Related terms

Max Pain, the usual target for an expiry butterfly
Strangle, the wings of an iron butterfly
Break-Even Point, how the two break-evens are found
Gamma, why the tent sharpens in the final days