Strategy guide
Butterfly Spreads Explained
A butterfly spread is a defined-risk strategy built with three strikes. It is often used when traders expect price to stay near a target area by expiration.
What is a butterfly spread?
A standard butterfly combines one long option at a lower strike, two short options at a middle strike, and one long option at a higher strike, all with the same expiration.
The strategy creates a tent-shaped payoff with a peak near the center strike.
Why traders use butterflies
- defined maximum risk
- targeted payoff around a price level
- often lower cost than some other multi-leg strategies
Trade-offs to understand
Maximum profit usually requires price to finish near the middle strike at expiration. If price moves too far away, gains shrink and can become a full max-loss outcome.
Time decay and volatility shifts can materially change the trade profile before expiration.
How to analyze butterflies in OTL2
Use the payoff chart to compare near-target outcomes versus large-move scenarios. Review break-even points and how quickly the profit zone narrows as expiration approaches.