Long Call Butterfly: Pinpoint Bet on a Specific Price Target
A long call butterfly buys 1 ITM call, sells 2 ATM calls, buys 1 OTM call — equidistant strikes, same expiration. Net debit. Max gain occurs at the middle (short) strike at expiration; defined max loss equal to debit paid.
The structure has an extreme risk-reward asymmetry: typical setups risk $1 to make $5–$10 if the stock pins exactly at the short strike. Probability of hitting max gain is low (the stock has to land precisely), but the asymmetric payoff makes the expected value attractive when you have a strong opinion about where the stock will end up.
Best deployed at low IV (cheap to set up) when you have a specific price target the stock is likely to gravitate toward — a major moving average, a round number with significant open interest, a technical support or resistance zone. The structure is a precision instrument: it prints at one point and is mostly worthless elsewhere, but it costs almost nothing relative to the potential payoff.
Frequently Asked Questions
What's the probability of max gain on a butterfly?
Low — typically 5–15% depending on strike width and DTE. The math relies on asymmetric payoff to compensate for low hit rate.
When should I close a butterfly early?
When the stock is near the short strike with 10–14 DTE — most of the gamma profit accrues in the final two weeks, but pin risk also peaks there.