Long Call Butterfly
A cheap, defined-risk bet that the market pins a specific strike, using three call strikes in a 1-2-1 ratio.
What is a Long Call Butterfly?
A Long Call Butterfly buys one lower-strike call, sells two middle-strike calls, and buys one higher-strike call — all equally spaced, same expiry. It is a low-cost, defined-risk strategy that profits most if the underlying pins exactly at the middle strike at expiry. The payoff forms a tent peaking at the centre. It offers an attractive risk-reward when you have a precise price target and expect low volatility.
Payoff Diagram
Profit & Loss at expiry
Per share (multiply by lot size 75). Gold dots mark breakeven points; green = profit, red = loss.
Construction
- Buy 1 ITM/lower-strike Call.
- Sell 2 ATM/middle-strike Calls.
- Buy 1 OTM/higher-strike Call. Strikes equally spaced; net debit paid = maximum loss.
When to Use It
Use when you expect the market to settle near a specific level by expiry with little movement. Cheapest to enter when the middle strike is near spot and IV is moderate. It is a precision, low-cost pinning trade.
The Greeks
Delta ≈ 0 near the centre, Positive Theta near the middle, Negative Vega, complex Gamma.
Risks & Considerations
- Very narrow zone of maximum profit — price must finish near the centre.
- Four legs mean higher transaction costs and slippage.
- Away from the centre the trade tends toward the (small) maximum loss.
Worked Example (Nifty)
Illustrative trade — lot size 75
Nifty 20,000. Buy 19,700 CE ₹350, sell 2× 20,000 CE ₹200, buy 20,300 CE ₹100. Net debit = 350 − 400 + 100 = ₹50 (₹3,750 max loss). Max profit at 20,000 = (300 − 50) × 75 = ₹18,750. Breakevens 19,750 and 20,250.