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Chapter 15

Butterfly spread

Three strikes, four contracts. A precision bet on a specific price target. Small cost, big potential payoff when you nail the level. Almost worthless if you don't. Deep dive: broken-wing, iron butterfly, batman spread, adjustment mechanics.

📖 14 min read 🇮🇳 Nifty monthly

The structure

A long butterfly with calls:

All same expiry. Wings equidistant from body.

Same shape with puts. Or as iron butterfly (calls + puts combined). Payoff identical.

Long butterfly — precision tent, max profit at the middle strikeProfitLoss
SPOT24,80025,00025,20022,30023,65025,00026,35027,700-150-3875188300
At Spot (25,000)
+₹175
Strikes
24,800 / 25,000 / 25,200

Peak profit at the middle strike (where the 2 shorts sit). Flat max loss = debit paid, on either wing. The narrower the tent, the better the R/R — but the smaller the profit zone.

What would this have done on real Nifty?

A detailed worked example

Example

Nifty 25,000 butterfly (call version)

Nifty at ₹25,000. Expect it to land close to 25,000 by monthly expiry (last Tuesday).

  • Buy 1 × 24,800 CALL at ₹300 → −₹19,500
  • Sell 2 × 25,000 CALL at ₹180 = +₹23,400
  • Buy 1 × 25,200 CALL at ₹90 → −₹5,850

Net cost: 19,500 − 23,400 + 5,850 = ₹1,950 debit

Max profit (at 25,000 exactly): spread width × lot − cost = 200 × 65 − 1,950 = ₹11,050

Max loss: ₹1,950 (limited to debit)

Break-evens:

  • Lower: 24,800 + 30 = 24,830
  • Upper: 25,200 − 30 = 25,170

Risk/reward: risk ₹1,950 to make ₹11,050 → 5.7:1 — excellent when it hits.

Butterfly payoff — peak at 25,000, floor at ±₹1,950ProfitLoss
SPOT24,80025,00025,20022,30023,65025,00026,35027,700-4k3255k9k13k
At Spot (25,000)
+₹11,050
Strikes
24,800 / 25,000 / 25,200

Peak profit at exactly 25,000 (₹11,050). Break-evens at 24,830 and 25,170 — only a 340-point profit zone. Beyond either wing, loss caps at the debit paid.

Formulas

Long butterfly

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)

When butterflies make sense

When they don’t

Butterfly variations

Advanced Advanced butterfly structures

Iron butterfly

Instead of all-call or all-put, mix:

  • Sell 1 ATM call + 1 ATM put (straddle body)
  • Buy 1 OTM call + 1 OTM put (strangle wings)

Same payoff shape as call/put butterfly. Different Greeks profile depending on IV skew. Wider break-evens usually.

Broken-wing butterfly

Wings unequal — set up for net credit rather than debit:

  • Buy 1 lower strike (narrow wing)
  • Sell 2 middle strikes (body)
  • Buy 1 further strike (wide wing)

Example: 24,600 / 24,800 / 25,200 (narrow wing 200; wide wing 400)

  • Buy 24,600 PUT (narrow) at ₹40
  • Sell 2 × 24,800 PUT at ₹80 = +₹160
  • Buy 25,200 PUT (wide) at ₹250 → −₹250

Net: (−40 + 160 − 250) × 65 = −₹8,450 debit… hmm.

Better example — call broken wing on Nifty (bullish tilt):

  • Buy 24,900 CALL at ₹250
  • Sell 2 × 25,000 CALL at ₹180 = +₹360
  • Buy 25,300 CALL at ₹80 (wide wing) → −₹80

Net premium per share = −250 + 360 − 80 = +30 credit; per lot 65 = +₹1,950 credit (near-zero cost or small credit)

Loss zone: only on the wide-wing side.

Broken-wing bets on direction with asymmetric payoff at very low cost.

Batman / double butterfly

Two butterflies at different strikes (looks like Batman ears):

  • One butterfly centered at 24,500
  • Another at 25,500

Bet on two possible landing zones (bimodal distribution).

Complex, expensive, rarely used by retail.

Managing a butterfly

Advanced Butterfly adjustment recipes

Scenario 1: Nifty at middle strike well before expiry

  1. Take profit at 25-50% of max — the last inch is expensive.
  2. Roll to a butterfly at a new strike if view has shifted.
  3. Hold to expiry only for tiny positions.

Scenario 2: Nifty broke out of range

  1. Cut loss when spread value = 50% of max loss (unusual — usually let expire).
  2. Let expire — loss is capped anyway.

Scenario 3: Time compression, still in profit zone

Approach expiry with Nifty near middle strike. Gamma is spiking; profit compressed but volatile.

  • Take profit at 60% of max — don’t push for the final 40% (gamma bites)

Entry timing

Enter 30-45 days from expiry:

  • Gives time value on body to work
  • Not so close that gamma dominates
  • Sweet spot for theta capture

Realistic use in India

Butterflies work best on large-cap monthlies with liquid strikes (Nifty, BankNifty, Sensex). Wing width 100-300 points typical.

Popular retail play: Nifty ATM butterfly the week before monthly expiry, when theta accelerates. Works ~30-40% of the time; that’s fine because 5.7:1 R/R compensates.

Position sizing

Formula

Max risk = Account × 2% Max lots = Max risk ÷ Net debit

Example: ₹5L account, 2% = ₹10K. Butterfly cost ₹2,250/lot → max lots: 4 lots.

Butterflies are one of the few strategies where you can size larger than most — the max loss is small.

💡 Not for beginners

Four legs, thin profit zone, requires precision timing. Master vertical spreads (Chapters 10-11) and iron condors (Chapter 14) first.

Pre-trade checklist

Summary