Long Butterfly

Quick answer: A Long Butterfly is a defined-risk neutral strategy of three equally spaced call strikes — buy one lower, sell two middle, buy one higher — for a small debit that pays a large multiple only if the underlying settles at the middle strike.

In simple words

A long butterfly is an inexpensive way to bet the market ends near a particular price. You buy one call below that price, sell two calls at it, and buy one call above it, all the same distance apart. The two you sell pay for most of the two you buy, so the whole thing costs only a small amount. If the market finishes exactly on the middle strike, the position is worth its most and you multiply that small cost several times over. If it finishes far away in either direction, everything cancels out and you lose only the small amount you paid.

Payoff diagram

Professional explanation

Built from calls, paid as a debit

This long butterfly uses three call strikes — long 23,700, short two 24,000, long 24,300 — spaced 300 points apart. The two short calls bring in premium that offsets most of the cost of the two long calls, leaving a small net debit of 38 per unit. That debit is the entire risk. Unlike the credit butterflies, nothing is collected up front; the payoff is realised at expiry through the shape of the position, which peaks sharply at the middle strike and falls away symmetrically on both sides.

Where the peak and the cap come from

At the middle strike the lower long call is worth its full 300 points of intrinsic value while the two shorts and the upper long are worthless, giving a peak payoff of 300 − 38 = 262 per unit. Beyond the wings the position is flat: below 23,700 all calls expire worthless and the loss is the 38 debit; above 24,300 the long calls exactly offset the two shorts and the payoff is again a flat 38 loss. The two long calls cap the two shorts on both sides, which is what makes the position defined risk.

The narrow, tall payoff

Breakevens are the lower strike plus the debit and the upper strike minus the debit: 23,700 + 38 = 23,738 and 24,300 − 38 = 24,262. That is a profit band 524 points wide, and the full 262-point payoff exists only at the single centre point. The ratio of maximum profit to maximum loss is 262 to 38, roughly 6.9 to 1, but that reward is earned only if price finishes on the strike, so the attractive ratio reflects a low probability of the full payoff, not a free lunch.

A short-volatility position in a long dress

Although the butterfly is bought for a debit, around the centre it behaves like a short-volatility structure: it is net short the two middle options, so it has negative gamma and negative vega near the peak and gains from time decay as expiry approaches with price near the centre. This is why it is generally opened when implied volatility is elevated and expected to fall — a drop in volatility lifts the position toward its peak value, while a rise flattens the tent and pushes the mark toward the debit.

Construction

1. Buy one lower-strike call (here the 23,700 call) as the lower wing.
2. Sell two middle-strike calls (the 24,000 calls) to form the body at the target level.
3. Buy one higher-strike call (the 24,300 call) as the upper wing, equally spaced from the body.
4. Confirm the strikes are equidistant and that the position opened for a small net debit, which is the maximum loss.

Market outlook

A trader may study a long butterfly when the expectation is that the underlying will drift toward and settle near a specific level, and that implied volatility is elevated and likely to ease. It is a low-cost pin bet: it risks little and pays well if price finishes on the middle strike, but that full payoff is a point outcome. The condition that invalidates it is a decisive move away from the target or a rise in volatility that keeps price mobile. Because the cost is small, it is sometimes studied as a defined way to express a precise level view without the credit butterfly's larger margin.

Risk profile

The long butterfly is a defined-risk position: the two long call wings cap the two short body calls on both sides, so the loss cannot exceed the net debit paid. That maximum loss is 38 per unit, or ₹2,850 on one NIFTY lot of 75, and it is reached across most of the settlement range — everywhere except the profit band around the centre. The risk is therefore small in rupees but likely in probability, the inverse of the reward. Before expiry the mark moves with volatility and gamma; there is no undefined tail because the wings bound both sides, and on cash-settled index options there is no assignment risk.

Reward profile

The maximum reward is the distance between adjacent strikes minus the debit, times the lot size — (300 − 38) × 75 = 262 × 75 = ₹19,650 — earned only if the underlying settles exactly at the middle strike. Away from the centre the reward tapers along the tent to the breakevens at 23,738 and 24,262. The reward is large relative to the small debit but is concentrated at a single point, so the typical outcome is a partial payoff or the small loss rather than the full amount.

Margin requirement

Because the two short body calls are hedged by two long wings, the exchange grants full spread benefit and the position is typically margined close to the net debit paid rather than as naked shorts. That makes a long butterfly one of the lighter neutral structures to carry. SPAN plus exposure still applies and NSE and brokers revise the formulas periodically; a debit butterfly rarely sees its margin rise materially because both tails are capped.

Greeks exposure

The sign on each Greek above is computed, not asserted: it is the net exposure of the illustrative legs at spot 24,000 with 30 days to expiry, priced with Black–Scholes using each leg's implied volatility calibrated from its own quoted premium. A sign can flip as the underlying moves — the panels below show where. See Methodology.

Volatility impact

Near the centre the long butterfly behaves as a short-volatility position despite being a debit trade, because it is net short the two body options. A fall in implied volatility lifts it toward its peak value, since the shorts lose value faster than the wings; a rise flattens the tent and marks it toward the debit. That is why it is generally opened when implied volatility is elevated and expected to ease. Far from the centre the sensitivity reverses slightly as the wings gain relative weight, but the dominant regime for a butterfly held near its target is falling volatility helping and rising volatility hurting.

Time decay

Time decay works for the long butterfly when price sits near the middle strike. As a net seller of the two body calls, the position gains value as their time premium erodes, and the tent grows sharper and taller as expiry nears with price near the centre. If price is out near or beyond a breakeven, time decay works against the position instead, bleeding it toward the small debit. The position therefore wants both proximity to the strike and the passage of time, and it is most sensitive to both in the final days.

Practical examples

Lot sizes used above (NIFTY 75, BANKNIFTY 30) are those in force at the time of writing; NSE revises them periodically. Figures exclude brokerage, STT, exchange charges, stamp duty and GST, all of which materially affect small spreads.

Common mistakes

• Expecting the full ₹19,650 as a likely outcome — it exists only at the exact middle strike, and the common result is a partial payoff or the loss of the small debit.
• Placing the butterfly with its centre far from the current price and treating it as cheap, when the low cost simply reflects the low chance of price reaching that centre by expiry.
• Opening it when implied volatility is low and expected to rise, which flattens the tent and works against a position that wants volatility to fall.
• Ignoring transaction costs, which on a 38-point debit and three legs can consume a meaningful share of both the cost and the realised payoff.
• Closing too early on a small favourable move, forgoing the sharp late gain that only materialises as expiry nears with price pinned near the centre.
• Chasing the position wider after price moves, paying fresh spreads to re-centre a structure whose whole appeal was its low cost.

Advantages & disadvantages

Professional usage

Desks use butterflies as a compact way to express a pinning view or to hedge the gamma of a larger book near a specific strike, valuing them by the local curvature they add rather than the rupee debit. A market maker may accumulate butterflies around heavy open-interest strikes where hedging flows tend to concentrate price near expiry. Institutions leg the three strikes across the day for better fills and hold many butterflies across levels, so the aggregate expresses the view. Retail traders can replicate the structure cheaply but not the cross-margin, the fill quality or the ability to warehouse it, so the same shape carries different practical costs.

Frequently asked questions

Voice search & related questions

Natural-language questions people ask about the Long Butterfly.

Sources & references

• NSE — Options trading and margins
• John C. Hull — Options, Futures, and Other Derivatives
• Sheldon Natenberg — Option Volatility and Pricing

Last reviewed 9 July 2026. Educational content only — not investment advice.