Chapter 10: The Butterfly Spread 
TABLE 10-1. 
Butterfly spread example. 
Current prices: 
XYZ common: 
XYZ July 50 call: 
XYZ July 60 call: 
XYZ July 70 call: 
Butterfly spread: 
Buy 1 July 50 call 
Sell 2 July 60 calls 
Buy 1 July 70 call 
Net debit 
60 
12 
6 
3 
$1 ,200 debit 
$1,200 credit 
$300 debit 
$300 (plus commissions) 
201 
The risk is limited in a butterfly spread, both to the upside and to the downside, 
and is equal to the amount of the net debit required to establish the spread. In the 
example above, the risk is limited to $300 plus commissions. 
Table 10-2 and Figure 10-1 depict the results of this butterfly spread at various 
prices at expiration. The profit graph resembles that of a ratio write, except that the 
loss is limited on both the upside and the downside. There is a profit range within 
which the butterfly spread makes money - 53 to 67 in the example, before commis­
sions are included. Outside this profit range, losses will occur at expiration, but these 
losses are limited to the amount of the original debit plus commissions. 
In accordance with more lenient margin requirements passed in 2000, the 
investment required for a butterfly spread is equal to the net debit expended, which 
is the risk in the spread. When the options expire in the same month and the strik­
ing prices are evenly spaced (the spacing is 10 points in this example), the following 
formulae can be used to quickly compute the important details of the butterfly 
spread: 
Net investment= Net debit of the spread 
Maximum profit = Distance between strikes - Net debit 
Downside break-even= Lowest strike+ Net debit 
Upside break-even= Highest strike - Net debit 
In the example, the distance between strikes is 10 points, the net debit is 3 
points (before commissions), the lowest strike used is 50, and the highest strike is 70. 
These formulae would then yield the following results for this example spread.