The long form sells two calls at the middle strike price and buys one each at the strike prices above and below, and is called a long butterfly (long call butterfly). As an option spread, it combines buying and selling calls with different strike prices, and the upper and lower strike prices are set at equal distances from the middle. The middle is called the body and the upper and lower are called the wings, and all options have the same expiry1. The opposite form, selling the upper and lower and buying the middle, also exists2.

Consider a hypothetical example in which you buy a call with a strike price of 90 yen, sell two calls at 100 yen and buy a call at 110 yen, paying a net 3 yen. If the price of the underlying asset at expiry is exactly 100 yen, the profit is at its maximum of 100 − 90 − 3 = 7 yen. At 90 yen or lower, or 110 yen or higher, the loss is the 3 yen paid. The break-even points are 93 yen and 107 yen. Profit arises when the price at expiry is near the body, and if the price ends far from the body, the loss is the 3 yen paid.

Notes

  1. The Options Industry Council, "Long Call Butterfly", the sections Description, Max Loss, Max Gain and Profit/Loss (the caps on profit and loss, and the positions of the body and wings). ↩

  2. Daiwa Securities, "バタフライスプレッド（金融・証券用語解説集）" (Butterfly spread, financial and securities glossary) (in Japanese), which describes buying (or selling) one option each at a higher and a lower strike price with the same expiry and selling (or buying) two options at the middle strike price. ↩