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Strategy: Butterfly, Bullish

Bullish Butterfly Option Graph

The Outlook: Bullish. Expecting a good rise in the stock before the expiration of the options. Entering when volatility is high is preferable.

The Trade: For the trade graphed above, an "Iron" Butterfly, sell puts and calls at the next strike price above the current stock price, buy calls one strike higher and buy puts one strike lower.

Gains when: Stock moves to and stays in a narrow range near the sold strike.

Maximum Gain: On an "Iron" Butterfly, limited to the initial credit.

Loses when: Stock does not rise to the lower breakeven point, or moves beyond the higher breakeven point.

Maximum Loss : Limited to the largest difference in strike prices on one side times the number of shares represented, less the initial credit.

Breakeven Calculation: (For an "Iron" Butterfly) Lower breakeven = sold strike price - initial credit. Upper breakeven = sold strike price + initial credit.

Advantages compared to stock: Increased leverage, much less capital required, "built-in" stop loss, can gain from a drop in implied volatility.

Disadvantages compared to stock: Will lose if stock rises too much.

Volatility: after entry, increasing implied volatility is negative.

Time: after entry, the passage of time is positive.

Margin Requirement : Most options-oriented brokers will require the difference in the strike prices x the number of shares represented, reduced by the amount of credit taken in. In the example above the margin would be $187.

Variations: Use all calls or all puts. An "Iron" Butterfly is called Iron because it uses both puts and calls.

Synthetic Equivalent:


  • A Butterfly trade is an "anti-gambler's trade". There is a good chance of a small profit, and a small chance of a loss. If you manage the trade so that you only take relatively small losses and not the maximum possible loss, you increase your chances of coming out ahead over the long term.
  • A Butterfly trade can be thought of as a safer alternative to selling a Straddle. Just selling a Straddle could expose you to unlimited losses. The long options that are part of the Butterfly trade serve to limit losses to a manageable amount, even if the stock moves unexpectedly beyond one of the breakeven points.
  • Butterfly trades require a large commission expense. Entering the trade will cost four commissions, and if you need to exit early there will be another four commissions. If you do not use the lowest-commission discount option brokers, the Butterfly trade might not make much sense. With most brokers, using more contracts will result in lower per-leg commissions overall and might make the trade reasonable.
  • The Butterfly is an "anti-volatility" trade: it will benefit from a drop in volatility. For this reason the Bullish Butterfly is a possible strategy to use at earnings time on a stock whose volatility has risen, and you expect some upward movement in the stock. After the earnings are out, the options may experience a "volatility crush", meaning they drop back to normal volatility, and the trade may benefit from that drop as well as the rise in the stock price.
  • Another scenario is a stock trading within a channel, that has recently dropped to the bottom of the channel. This drop will usually cause an increase in implied volatility because of stock owners becoming more fearful and buying puts. If you expect the stock to recover and return to the top of the channel, a Bullish Butterfly would benefit from both the rise in the stock price, and the return to a normal (lower) implied volatility.
  • If you have a bullish outlook, but want to benefit from an increase in volatility, the Calendar Call, OTM is a similar strategy. Plus, it requires only two commissions.
  • The Butterfly strategy gets it's name from the graph. It reminded traders of a small creature with wings. Compare to the Condor graph, that looks like something bigger with wings.


  • The Butterfly trade gains if the stock moves to a narrow range around the short strike and time passes. If the stock drops, or moves beyond the upper breakeven at any time, the losses can multiply quickly up to the maximum possible. Using the graph at the top of the page, if the stock were to move to 49 or 61 at any time, it would be wise to cut the losses short at about $50, which is about half of the maximum possible loss.
  • If the reason for entry was to capture a decline in volatility, then an exit when the volatility drops makes sense.
  • This trade is similar to the Calendar Call in that the closer you are to expiration, the greater your risk of giving back any gains you have. For this reason, it may be a good idea to exit Butterfly trades when there is a week left to expiration. See the Delta Neutral Trading page for more information.

Just like the normal Butterfly, the Bullish Butterfly strategy can be set up with all Calls or all Puts, and the graph is nearly identical to the Bullish "Iron" Butterfly. The main difference is the Iron Butterfly is entered for a credit, whereas the strategy using all calls or all puts has an initial debit. See the Butterfly page for graphs with all calls or all puts.

If you are more bullish than might make sense with a normal Bullish Butterfly, you can use a "modified" Bullish Butterfly as shown in the graph below. This strategy will show greater gains at the "sweet spot", and will not lose at any price if the stock rises. The tradeoff is that there is more of a loss if the stock drops. The modified Bullish Butterfly is constructed by buying the long put one strike lower than normal. Your broker will require more margin for the modified Butterfly - up to $1000 on the example shown.

Before using a modified Bullish Butterfly, it makes sense to compare it to a Bull Call using similar strikes, as shown below. The Bull Call will respond more quickly to a rise in prices, keeps the gains on any rise beyond the short strike, is entered for a debit, does not require margin, and requires fewer commissions. The modified Bullish Butterfly will respond more quickly to a drop in implied volatility, is entered for a credit, requires margin, and allows for very slight stock price movement to the downside.


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