Three strikes, four contracts: long one wing, short two at the body, long the other wing. A cheap, defined-risk bet on the underlying finishing near the body.
A butterfly is two verticals stitched together — a debit spread below the body and a credit spread above it. The payoff is a tent: maximum value at the middle strike at expiration, zero outside the wings, and a cost that is usually a small fraction of the wing width.
Butterflies are a pin bet, and they only pay near expiration. Two weeks out, a fly sitting exactly at the body might show 20% of its potential; the tent shape only appears as time-value drains from the body. Traders who buy flies early and expect immediate profit are fighting the time-decay-curve.
Example: XYZ at $50. Buy the $47.50 call, sell two $50 calls, buy the $52.50 call for a $0.55 net debit. Max loss $55, max profit $195 with XYZ pinned at $50, breakevens $48.05 and $51.95. Risking $55 to make $195 is why traders keep coming back to the structure.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.
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