28 Nov, 2025
5 mins read
The butterfly option strategy is a popular approach among traders who want to benefit from stable market conditions with limited risk. It is a structured options strategy that aims to profit when an asset’s price stays within a specific range. Traders often choose this method when they want controlled risk and predictable outcomes.
This guide explains the meaning of the butterfly strategy, its types, how it works, and when traders should consider using it.
A butterfly option strategy is a neutral options strategy that combines both buying and selling options at different strike prices. It is designed to generate profit when the underlying asset stays close to a chosen strike price by the time the options expire.
The strategy uses three different strike prices:
A lower strike price
A middle strike price
A higher strike price
The trader benefits the most when the asset’s price closes near the middle strike price. The risk is limited, and so is the profit potential.
Traders use different versions of the butterfly strategy based on market expectations.
Involves buying one call option at a lower strike.
Selling two call options at a middle strike.
Buying one call option at a higher strike.
Best suited for neutral market conditions.
Involves buying one put option at a higher strike.
Selling two put options at a middle strike.
Buying one put option at a lower strike.
Works when the trader expects low volatility.
Uses a combination of call and put options.
Involves selling an at-the-money call and put.
Buying out-of-the-money call and put options.
Suitable when a trader wants to benefit from very low volatility.
A long call butterfly is the most common version of the strategy. It works as follows:
Buy one call option at a lower strike price.
Sell two call options at a middle strike price.
Buy one call option at a higher strike price.
This creates a limited-risk, limited-reward setup. The maximum profit occurs when the underlying asset expires at the middle strike price. The maximum loss is the net premium paid to enter the trade.
Key points:
Profit is highest when the asset stays near the middle strike.
Loss occurs if the asset moves too far up or down.
The breakeven points are the lower and upper bounds based on premiums.
Traders should consider a butterfly strategy in the following situations:
When the market is expected to stay stable, a butterfly strategy helps capture small price movements.
If a trader expects minimal movement after an event or announcement, the strategy may work well.
When the asset is moving within a steady price range, the butterfly setup can generate returns with controlled risk.
The strategy involves limited investment and controlled exposure, making it suitable for cautious traders.
The butterfly strategy offers several benefits:
Limited Risk: The maximum loss is fixed and known in advance.
Low Cost: The net premium is usually low because the sold options help reduce overall cost
Ideal for Neutral Markets: Works well when the market is stable.
Clear Profit Range: Traders can estimate potential profit and loss before entering the trade.
Flexible Structure: Traders can choose call or put versions depending on the market outlook.
Despite its benefits, the butterfly strategy has some limitations:
Limited Profit Potential: The maximum gain is capped.
Sensitive to Volatility: Sudden market movement can reduce or eliminate profit.
Complex for New Traders: Managing three strike prices may be confusing.
Time Decay Impact: The position loses value quickly if the price moves away from the middle strike.
Imagine a stock trading at ₹100. A trader expects it to stay near this level until expiry.
They create a long call butterfly using the following options:
Buy one call at ₹95
Sell two calls at ₹100
Buy one call at ₹105
Suppose each option has a premium that results in a net cost of ₹2.
If the stock expires at ₹100: The trader earns the maximum profit.
If the stock falls below ₹95 or rises above ₹105: The trader faces a limited loss equal to the net premium.
If the stock expires between ₹95 and ₹105: Partial profits or small losses may occur.
This example shows how the strategy works best in stable conditions.
The butterfly option strategy is a useful tool for traders who expect limited movement in the market. It allows them to earn predictable returns while keeping risk under control. Although it restricts profit, its low cost and defined risk make it attractive for disciplined traders. Understanding how it works helps traders decide when to use it effectively.
It is a strategy that uses multiple options to profit from a stable market. The trader benefits when the asset stays near a chosen price.
The risk is limited because the maximum loss is known in advance. However, the reward is also limited.
The success rate depends on market conditions. It works best when the asset stays within a narrow range.
A butterfly uses four options: two sold options at the middle strike and two bought options at the lower and higher strike prices.
Beginners can trade it, but they should understand how option pricing and volatility work before using this strategy.
Calculate your Net P&L after deducting all the charges like Tax, Brokerage, etc.
Find your required margin.
Calculate the average price you paid for a stock and determine your total cost.
Estimate your investment growth. Calculate potential returns on one-time investments.
Forecast your investment returns. Understand potential growth with regular contributions.
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