Butterfly Spread (Options): A Low-Cost Bet That a Stock Stays Put
A butterfly spread is a defined-risk, defined-reward options strategy built from three strike prices on the same underlying and expiry — combining a bull spread and a bear spread — that achieves its maximum profit when the underlying price finishes exactly at the middle strike at expiry.
Not financial advice. All figures for educational reference only. Data as at October 2026.
Last updated: October 2026
Key Takeaways
- A standard (long call) butterfly spread uses three strikes: buy 1 lower-strike call, sell 2 middle-strike calls, and buy 1 higher-strike call, all with the same expiry.
- Maximum profit occurs if the underlying closes exactly at the middle strike at expiry; maximum loss is limited to the net premium (debit) paid to open the position.
- The strategy is popular for low-volatility, range-bound views — the opposite market outlook to a long straddle or strangle.
- Because it involves four option legs (or three strikes with the middle one doubled), transaction costs and commissions matter more for butterfly spreads than for simpler strategies.
- Singapore traders typically build butterfly spreads on liquid US-listed index ETFs or large-cap stocks, since multi-leg option execution needs tight bid-ask spreads to be worthwhile.
What Is Butterfly Spread (Options)?
A butterfly spread combines elements of a bull call spread and a bear call spread into a single position with three strike prices. In its most common form — the long call butterfly — a trader buys one call at a lower strike, sells two calls at a middle strike, and buys one call at a higher strike, with all four contracts (1+2+1) sharing the same underlying and expiry date. The strikes are typically equally spaced, for example USD 95 / USD 100 / USD 105.
The payoff diagram of a butterfly spread resembles a tent or a butterfly’s wings, which is where the name comes from: profit rises as the underlying approaches the middle strike, peaks exactly at that strike, and then falls away symmetrically on either side. This makes it fundamentally a bet that the underlying will trade near a specific price by expiry — essentially a low-volatility, pinned-price view, which is the opposite of what a strangle or straddle buyer is betting on.
Because the position is built from a long and a short spread that largely offset each other, the net cost (the “debit”) to open a butterfly spread is usually small relative to the width between strikes, which caps both the maximum loss and the maximum possible gain at modest, well-defined levels. This makes butterfly spreads attractive to traders who want to express a precise price view with limited capital at risk.
How Does It Work in Singapore?
Butterfly spreads require four separate option legs to be filled at reasonable prices, which makes execution quality unusually important. On SGX, where single-stock options liquidity is thin for all but a few blue-chip names, the combined bid-ask spread across four legs can erase most of the strategy’s edge. For this reason, Singapore-based traders running butterfly spreads overwhelmingly use US-listed, highly liquid underlyings — S&P 500 index ETFs, Nasdaq-100 ETFs, or mega-cap tech names — accessed through brokers such as Interactive Brokers, Tiger Brokers, or moomoo that support multi-leg combo orders in a single ticket.
Multi-leg “combo” order types matter here: placing all four legs as one combined order (rather than four separate trades) typically gets a better net price and avoids the risk of only some legs filling, which would leave the trader with unintended, unhedged exposure. Singapore brokers that offer US options access generally support combo orders for standard multi-leg strategies like butterflies, verticals, and condors.
| Leg | Action | Strike |
|---|---|---|
| 1 | Buy 1 call | Lower (e.g. USD 95) |
| 2 | Sell 2 calls | Middle (e.g. USD 100) |
| 3 | Buy 1 call | Higher (e.g. USD 105) |
Source: Standard long call butterfly structure — illustrative strikes only.
Butterfly Spread (Options) Example
A Singapore trader believes a US index ETF trading at USD 100 will stay roughly flat over the next month. They set up a long call butterfly with USD 5-wide strikes:
Buy 1 call, strike USD 95, costing USD 6.50.
Sell 2 calls, strike USD 100, each at USD 3.00 (total credit USD 6.00).
Buy 1 call, strike USD 105, costing USD 1.00.
Net cost: USD 6.50 − USD 6.00 + USD 1.00 = USD 1.50 per share, or USD 150 per butterfly (one contract = 100 shares). At SGD/USD 1.34, that’s about SGD 201 at risk.
If the ETF closes exactly at USD 100 at expiry, the lower call is worth USD 5.00, the two short calls expire worthless, and the upper call expires worthless — for a position value of USD 500, against a USD 150 cost, a profit of USD 350 (before commissions). If the ETF instead finishes below USD 95 or above USD 105, all legs expire worthless or fully offset, and the trader loses the full USD 150 premium paid.
Advantages
Low, clearly defined maximum loss. The maximum loss on a long butterfly spread is capped at the net premium paid, which is typically small relative to the width of the strikes.
Attractive risk-reward ratio near the target price. Because the potential profit can be several times the premium paid if the underlying lands near the middle strike, the strategy offers a favourable payout profile for a precise price view.
Lower cost than buying a single at-the-money option outright. The short middle-strike calls partially offset the cost of the two long calls, making the net debit smaller than an outright directional option purchase.
Works well around known low-volatility periods. Butterfly spreads suit situations where a trader expects a stock to settle near a specific level, such as after a widely anticipated event has already been priced in.
Risks and Limitations
Requires the underlying to land in a narrow range. The probability of the underlying closing exactly near the middle strike at expiry is often lower than traders expect, meaning the position frequently expires worthless even without a large adverse move.
Four-leg execution risk. Entering and exiting a butterfly spread involves multiple legs; poor fills or wide bid-ask spreads on any one leg can meaningfully erode the strategy’s edge, especially on thinly traded underlyings.
Commissions can be a larger percentage of profit. Because the position size (premium at risk) is often small, per-contract commissions charged on four legs can represent a disproportionately high cost relative to potential profit.
Limited upside even in the best case. Unlike a long call or a strangle, the butterfly spread’s maximum profit is capped — a much bigger move than the trader expected won’t generate extra profit beyond the capped maximum.
Early assignment risk on short legs. The two short middle-strike calls can, in rare cases, be exercised early by the counterparty before expiry, particularly around dividend dates for US stocks, disrupting the intended structure.
The Bottom Line
For Singapore investors comfortable with multi-leg options, a butterfly spread is a capital-efficient way to bet that a stock settles near a specific price — the defined, limited risk is attractive, but the trade-off is a capped profit and a real chance of losing the full premium if the price drifts even moderately outside the target zone.