Butterfly spread: A defined-risk options strategy explained

A butterfly spread is a multi-leg options trading strategy that combines four call and/or put options positions to create a defined-risk payoff at expiration, with potential gains and losses both limited under standard assumptions.

There are six different variations of the strategy across two construction families, standard and iron. Each variation serves distinct goals. Some target settlement near a specific price, while others benefit from a sufficiently large move away from the price. You choose the variation that matches your view of where the underlying asset will land.

In this article we cover the two construction families, illustrate a long call worked example, and provide the path to follow on the Bybit App to use the strategy.

Key Takeaways:

• Standard butterfly strategies use four calls or four puts, while iron butterflies combine both calls and puts to construct positions.

• Long standard and iron butterflies generally target the middle strike point to profit, while the short and reverse iron versions benefit from larger moves away from the strike.

• Besides the standard breakevens and profit/loss zones, fees, liquidity, execution and pre-expiration pricing can all affect your final result.

What is a butterfly spread strategy?

Butterfly spreads, a variety of options strategies containing four legs, share the same underlying asset and expiration date, but are based on three different strike prices. They come in two main types or families: standard and iron. Each family assembles its legs differently, based on a combination of call and/or put options.

The term "butterfly spread" does not describe one universal payoff profile. Two four-leg structures can both carry the same general name butterfly spread but still pay out differently.

How is a butterfly spread constructed?

A butterfly spread combines options at three strike prices: a lower strike, a middle strike and a higher strike. The classic butterfly spread uses evenly spaced strikes, meaning the gaps between them are equal.

You can build the spread with calls, which gives you a call butterfly, or with puts, which is a put butterfly. Regardless of the version, a standard butterfly uses the same 1:2:1 ratio. For a long butterfly, you buy one option at the lower strike, sell two at the middle strike and buy one at the higher strike. All options share the same underlying asset and expiration date.

A short butterfly reverses the long version’s setup. You sell one at the lower strike, buy two at the middle strike and sell one at the higher strike, thus creating the opposite expiration payoff.

An iron butterfly combines a short straddle (in which you sell a call and a put at the middle strike) with a long strangle (in which you buy a put at the lower strike and a call at the higher strike). In contrast, a reverse iron butterfly flips every leg: you buy the middle-strike call and put, and sell the outer-strike put and call. Unlike standard call and put butterflies, iron butterflies use four distinct option positions rather than a 1:2:1 ratio.

Butterflies with unequal strike spacing are known as broken-wing butterflies. These are more advanced variations and fall outside the scope of this article.

Types of butterfly spreads

The main difference between butterfly variations is in the way they generate their greatest profit at expiration. Long call, long put and standard iron butterflies generally benefit when the underlying finishes near the middle strike. Their maximum profit occurs at that strike under the standard symmetrical setup, with potential profits declining as the settlement price moves away from it.

In contrast, short and reverse iron butterfly versions work the opposite way. With these variations, you benefit from larger price movements away from the middle strike, with maximum profit typically reached beyond the outer strikes.

Call and put butterflies can produce equivalent expiration payoffs when strikes, expiration, quantities and assumptions align. However, their entry costs may differ because premiums, bid-ask spreads and liquidity aren't necessarily identical.

The table below summarizes the two main families of butterflies.

Butterfly spread example

Long call butterfly example for Bitcoin (BTC)

Let’s assume BTC is trading at $80,000. You open a one-month long call butterfly with evenly spaced strikes and 1 BTC per contract:

• Buy one call at a $78,000 strike for $3,500

• Sell two calls at a $80,000 strike for $2,400 each ($4,800 total)

• Buy one call at a $82,000 strike for $1,600

Net debit: $3,500 + $1,600 − $4,800 = (debit) $300.Bybit transaction fees. Assuming non-VIP maker orders and an index price of $80,000, the opening fee is 0.02%, or $16 per BTC of option quantity. Across all four option units, that's $64. If BTC settles at $80,000, only the $78,000 call is exercised, so you pay a 0.015% delivery fee of around $12. Total fees (the trading fee and the delivery fee) are $76, which cuts your $1,700 maximum profit to $1,624.For the simplicity of our example, the figures below exclude transaction fees.

• Maximum loss: $300 (the net debit)

• Maximum profit: $2,000 strike spacing − $300 = $1,700, reached if BTC settles at $80,000

• Lower breakeven: $78,000 + $300 = $78,300

• Upper breakeven: $82,000 − $300 = $81,700

In this example, you profit if BTC settles between $78,300 and $81,700. Outside the 78,000–82,000 range, you lose the full net debit of $300.

Long call butterfly example for BTC at $80,000

Butterfly spread payoff at expiration

Based on our earlier example, the outcome values are as follows:

Note that the outcome values above are all at expiration. These should be distinguished from position values before your contracts’ expiration.

How to trade a butterfly spread on Bybit

The route depends on the market you want to trade. For crypto Options, start from Trade → Options. For Perp Options on TradFi assets, start from TradFi → Options. The strategy setup is otherwise similar.

On the Bybit App, switch to Pro mode and open Strategies. Select Butterfly, then tap on Trade Now. Choose the options trading pair and expiration, then configure the three strike rows using the Buy/Sell, Call/Put, strike and quantity controls. For a standard long call butterfly, buy the lower-strike call, sell twice the quantity at the middle strike and buy the higher-strike call, following a 1:2:1 ratio.

Review the payoff chart, Max Profit and Total Margin before tapping on Create Strategy. On the confirmation screen, check all three option legs, as well as their quantities, expiry and margin requirements before confirming your order.

The Butterfly preset supports standard call and put butterflies, including broken-wing variations with uneven strike spacing. However, iron butterflies, which combine calls and puts, are not supported.

The video below shows how to select the Butterfly preset and configure long call and short put butterflies in the Bybit App.



Benefits, risks and limitations

Butterfly spreads provide the benefit of defined expiration risk under standard assumptions. They also let you shape a payoff around a specific market view. You can set positions for the outcome you expect, instead of trying to anticipate a broad directional move. The long versions and the iron butterfly are particularly useful when you expect a range-bound market.

The key limitation is the capped profit. In addition, the profitable range can be fairly narrow in general, which leaves little room for error if price drifts away from your target. Complexity and fees are also drawbacks, since a butterfly spread involves no fewer than four legs, and you end up paying multi-leg fees. Liquidity risk and execution risk also apply, as filling every leg at your intended prices is not a completely guaranteed outcome.

Certain risks apply before expiration, too. Time decay, implied volatility (IV) and gamma all affect the position while it remains open. Margin requirements and liquidation risk also depend upon the butterfly setup and account margin mode.

Lower upfront cost isn't a benefit you can assume across the whole butterfly family. The strategy is also not inherently low-risk. It's advisable to evaluate each structure on its own terms, including its limits and the costs of entering and managing it.

The bottom line

Butterfly spreads combine multiple option legs to build a defined expiration payoff around a specific market view. You get a clearly defined profit zone, but you also accept limited maximum profit and added execution complexity.

If you want to put butterfly spreads into practice, the Bybit Options trading interface serves as a good starting point.

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