# The Butterfly Spread

## Long Butterfly Spreads

*For all examples below let’s assume TSLA stock price is currently trading $660 per share.*

**Bullish Butterfly Spread:**

- Buy 1 TSLA 700C = -$8.25
- Sell 2 TSLA 725C = +$8
- Buy 1 TSLA 750C = -$2.25
- Total Cost (risk): $2.5
- Max Gain: (potential) $22.5 (width of single spread minus total cost)

This trade is profitable if TSLA is between 702.5 (long lower strike + total cost) and 747.5 (long higher strike – total cost) at expiration. This trade will break even if TSLA is exactly 702.5 or 747.5 at expiration. Max loss is realized at expiration if TSLA is below 700 or above 750. Max gain is realized at expiration if TSLA is exactly 725. The closer the stock is to the short strikes at expiration the more profitable the position will be.

**Bearish Butterfly Spread:**

- Buy 1 TSLA 650P = -$18
- Sell 2 TSLA 600P = +$10
- Buy 1 TSLA 550P = -$1.5
- Total Cost (risk): $9.5
- Max Gain: (potential) $40.5 (width of single spread minus total cost)

This trade is profitable if TSLA is between 640.5 (long higher strike – total cost) and 559.5 (long lower strike + total cost) at expiration. This trade will break even if TSLA is exactly 640.5 or 559.5 at expiration. Max loss is realized at expiration if TSLA is above 650 or below 550. Max gain is realized at expiration if TSLA is exactly 600. The closer the stock is to the short strikes at expiration the more profitable the position will be.

**Neutral Butterfly Spread:**

- Buy 1 TSLA 680P = -$34
- Sell 2 TSLA 660P = +$45
- Buy 1 TSLA 640P = -$14
- Total Cost (risk): $3
- Max Gain: (potential) $17 (width of single spread minus total cost)

This trade is profitable if TSLA is between 677 (long higher strike – total cost) and 643 (long lower strike + total cost) at expiration. This trade will break even if TSLA is exactly 677 or 643 at expiration. Max loss is realized at expiration if TSLA is above 680 or below 640. Max gain is realized at expiration if TSLA is exactly 660. This butterfly position is neutral because the current stock price is 660 (short contracts are ATM). The trader would want the stock to remain flat and capitalize on theta decay of the short 660P as well as IV crush. The position remains neutral using puts (as shown) or with calls so long as the short contracts are ATM.

The Long Butterfly is a strategy that involves simultaneously buying a vertical spread and selling a vertical spread with the short contracts both sharing the same strike. All contracts traded share the same expiration. This allows the trader a range in which to be profitable surrounding the short strikes, as well as leveraging theta to their advantage. The greater the distance of the “wings” (long contracts) from the “body” (short contracts) the greater the chance of profitability and the higher the cost of the position. The goal of the long butterfly is for the stock to be as near to the short contracts at expiration as possible. If the stock is trading at the short strikes ahead of expiration the position will not be at the full potential value yet (theta decay has not fully occurred) however its likely it can still be closed for a profit. Long Butterflies offer a trader great R/R as they are low capital intensive and offer significant upside.