neutralPays debit

Call Butterfly

A call butterfly buys one call, sells two at a higher strike, and buys one more above that. It costs little and pays many times its cost if the stock finishes near the middle strike — a precision bet on where a stock will land.

When it makes sense

You have a specific price target at expiration
You want a high payoff-to-cost ratio with strictly defined risk
Broken-wing variant: you want to remove risk entirely on one side in exchange for more on the other

How it works

Buy one call at K1, sell two calls at K2, buy one call at K3 (K1 < K2 < K3), all in the same expiration. Max profit is (K2 − K1) minus the debit, hit exactly at K2. Making one wing wider than the other (a broken wing) shifts cost and risk toward that side.

Risk & reward

Maximum loss: the small debit (symmetric fly) — or, in a broken-wing fly, the wider wing's width minus the credit collected. Maximum profit requires the stock to land close to the short strike, so realized profits are usually a fraction of the theoretical max. Time decay helps once the stock is near K2.

Worked example

Stock at $98. Buy the 20-day $95 call, sell two $100 calls, buy the $105 call for a $1.00 debit ($100). Stock at $100 at expiration: the fly is worth $500 — a $400 profit (4:1). Below $95 or above $105: lose $100.

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