Three strikes, four contracts. A precision bet that the underlying will land at a specific price at expiry. Small cost, big payoff if you nail the level. Almost worthless if you don't.
A long butterfly with calls:
All same expiry. Wings are equidistant from body.
Same shape can be built with puts. Or as an iron butterfly = combination of calls and puts. Payoff diagrams are identical.
Nifty at ₹25,000. You expect it to land close to 25,000 by monthly expiry.
Net cost: 7,500 − 9,000 + 2,250 = ₹750 debit
Max profit (at 25,000 exactly): spread width × lot − cost = 200 × 25 − 750 = ₹4,250
Max loss: ₹750 (limited to the debit)
Break-evens:
Payoffs at expiry:
Nifty at 25,000 (bullseye): max profit +₹4,250.
Nifty at 25,100: partial profit ~₹2,250.
Nifty at 25,300 or 24,700 (outside wings): max loss ₹750.
Risk/reward: risk ₹750 to make ₹4,250 → ~5.7:1.
Net cost = (Long lower + Long upper) − 2 × Middle premium
Max profit = (Middle strike − Lower strike) × Lot − Net cost
Max loss = Net cost
Break-evens: Lower BE = Lower strike + Net cost / lot Upper BE = Upper strike − Net cost / lot
Broken-wing butterfly: unequal spacing between wings. Can be constructed for a small credit (net premium received). Effectively an OTM directional bet.
Iron butterfly: sell an ATM straddle + buy an OTM strangle. Same payoff shape but built with all four contract types. Wider break-evens usually.
Batman spread: two butterflies at different strikes → looks like Batman’s ears. Bets on two possible landing zones.
Butterflies work best on large-cap monthlies with liquid strikes (Nifty, BankNifty). Wing width of 100-300 points typical.
Popular retail play: Nifty ATM butterfly the week before monthly expiry, when theta decay accelerates. Works ~30-40% of the time; that’s fine because the 5.7:1 R/R more than compensates.
Four legs, thin profits in most cases, requires precision timing. Master vertical spreads (Chapters 6-7) and iron condors (Chapter 10) first.
Payoff calculator → “Butterfly” preset. Notice the sharp peak at the middle strike — nail that point and you’re rich; miss by 100 points and you lose most of it.