Target a precise price with capped risk and minimal premium.
Butterfly spreads are a favorite of advanced options traders who want to take a view on where the market will land at expiry, without risking large amounts of capital.
They let you define both maximum profit and maximum loss in advance, and are especially useful when you expect price to stay within a tight range.
What Is a Butterfly Spread
A butterfly spread uses three strikes of the same type and expiry:
- Long 1 option at the lowest strike
- Short 2 options at the middle strike
- Long 1 option at the highest strike
This can be done with calls (call butterfly) or puts (put butterfly).
Example: Call Butterfly
Suppose BTC is trading at $60,000.
- Buy 1 call at $58,000
- Sell 2 calls at $60,000
- Buy 1 call at $62,000
- All with the same expiry
Setup:
- Net premium paid is low compared to other strategies
- Maximum profit occurs if BTC closes at $60,000 at expiry
- Losses are limited to the premium paid
Butterfly Spread Payout
- Maximum gain is achieved if the underlying lands exactly at the middle strike at expiry
- Maximum loss is the net premium paid
- If price is above or below the outer strikes at expiry, all options expire worthless except the long call in-the-money
Why Use Butterfly Spreads
- Target a specific price outcome at expiry
- Risk is strictly limited
- Low-cost strategy with high potential reward-to-risk ratio
- Can be used for neutral, bullish, or bearish views
Butterflies are ideal for event trades, expiry pinning, or whenever you believe price will cluster at a level.
On Derive
- Construct butterfly spreads by selecting three strikes in the options chain
- Margin, payoff, and Greeks are calculated automatically
- Subaccounts let you isolate and manage butterfly risk separately
- Use payoff charts to visualize max gain and loss
Your Action Today
- Pick a price target on BTC or ETH
- Build a call or put butterfly around that strike
- Observe the premium required, the max profit, and the breakeven points
- Watch how the Greeks (Delta, Gamma, Theta) shift as price moves near expiry
Tomorrow, we will move to iron butterfly spreads, which combine the butterfly concept with credit spreads.
Coming tomorrow:
Day 28 – Iron Butterflies: Premium Harvesting at the Pin
Hasta manana
Cpt
CptRandlelwa
