Stock Market · Option Strategies

Butterfly spread

A butterfly spread is a precision trade: you bet the underlying will close at or near a specific price at expiry. It has limited risk and limited reward.

Construction (call butterfly)

Example: Nifty at 22,000, you expect it to close near 22,000.

• Buy 1 × 21,800 call @ ₹350
• Sell 2 × 22,000 call @ ₹250 each
• Buy 1 × 22,200 call @ ₹160
• Net debit: 350 − (2 × 250) + 160 = ₹10

Payoff

• Maximum profit at 22,000 at expiry: (22,000 − 21,800) − 10 = ₹190 × 75 = ₹14,250
• Maximum loss: ₹10 × 75 = ₹750 (if Nifty goes below 21,800 or above 22,200)

> The butterfly has an extraordinary risk-reward ratio. ₹750 at risk to make ₹14,250. But you need a very precise outcome.

Why the risk-reward looks amazing but isn't free

The probability of Nifty closing exactly AT a specific strike is low. You can structure butterflies in a band (broken wing butterfly, wide butterfly), but the payoff shrinks.

When to use

• When you have a strong view that markets will pin near a specific level at expiry
• On expiry day. Butterflies are popular as expiry-day plays since they require precise pinning
• As a cheap event trade when you expect a non-event (e.g., Nifty stays at current levels through an RBI meeting)

Butterflylimited risk, precision bet, maximum payoff only if underlying pins the body strike.

Takeaway. Butterfly spread: buy 1 lower call, sell 2 middle calls, buy 1 higher call. Exceptional risk-reward but only profitable if the underlying closes near the middle strike at expiry. A precision trade.