Knowing when to invest and how to invest in it can be tricky, even for the experienced investor. When it comes to options trading, there are a myriad of strategies that can be used. In our previous articles, we covered some common basic and income strategies used in options trading as well as what iron condors are and how they are used.
In this article, we take a general look at some of the more advanced strategies used by expert investors. We will explain the difference between the different types of butterfly spreads and explore what benefits and risks these strategies present to the investor.
What is a Butterfly Spread?
This strategy combines both bull and bear spreads and is most commonly used to take advantage of perceived future low volatility. A butterfly spread uses three strike prices: buying one option at the lowest strike, selling two options at the middle strike, and buying one at the highest strike. This strategy is ideally used when an investor expects the stock price to remain stable and hover near the middle strike price.
• Ideal Scenario: Use this when expecting minimal price movement.
• Benefit: Low risk with a potential for high reward.
• Risk: Limited to the net premium paid.
Types of Butterfly Spreads
To illustrate the differences in strategies, we will use SDR S&P 500 (SPY) as the underlying stock for the below examples of the types of butterfly spreads.
Source: Tiger Trade app 20/02/25
Long Call Butterfly Spread
A long call butterfly spread is an options strategy used when a trader expects low volatility and believes the underlying asset will stay near a specific price at expiration. It involves three different strike prices and consists of four call options. The maximum profit that can be achieved when using this strategy is based on whether the price of the underlying at expiration is the same as the written calls. The maximum loss is the cost of the premiums paid, plus any commissions paid.
Short call butterfly spread
A short call butterfly spread is an options strategy used when a trader expects increased volatility and believes the underlying asset will move significantly away from a targeted price at expiration. It involves three different strike prices and consists of four call options positioned opposite to those in a long call butterfly spread. The maximum profit is achieved if the underlying price moves well below the lowest strike or above the highest strike, while the maximum loss is defined as the difference between the wing strikes minus the net premium received, plus any commissions paid.
Long put butterfly spread
A Long put butterfly spread is an options strategy used when a trader expects low volatility and believes the underlying asset will remain near a specific price at expiration. It involves three different strike prices and consists of four put options arranged in a structure similar to the long call butterfly spread. The maximum profit is realized if the underlying price is exactly at the middle strike at expiration, while the maximum loss is limited to the total cost of the premiums paid plus any commissions incurred.
Short put butterfly spread
A Short put butterfly spread is an options strategy used when a trader anticipates higher volatility and expects the underlying asset to deviate significantly from a specific price at expiration. It involves three different strike prices and consists of four put options arranged in the reverse manner of a long put butterfly spread. The maximum profit is attained if the underlying price finishes far away from the middle strike—either well below the lowest strike or above the highest strike—while the maximum loss equals the difference between the wing strikes minus the net premium received, plus any commissions paid.
Iron butterfly spread
An Iron butterfly spread is an options strategy used when a trader expects low volatility and believes the underlying asset will remain close to a specific price at expiration. It combines both call and put options using three different strike prices. The strategy is typically constructed by selling a call and a put at the same middle strike (forming a short straddle) while buying an out-of-the-money call and put at the wing strikes. The maximum profit is achieved when the underlying price is at the short strike at expiration, and the maximum loss is the difference between the wing and middle strikes minus the net premium received, plus any commissions paid.
Reverse iron butterfly spread
A Reverse iron butterfly spread is an options strategy used when a trader expects high volatility and anticipates that the underlying asset will move significantly away from a specific price at expiration. It involves the same three different strike prices as the iron butterfly but with reversed positions. This strategy is established by buying a call and a put at the middle strike while selling out-of-the-money call and put options at the wing strikes. The maximum profit is achieved if the underlying price finishes well below the lowest strike or above the highest strike, while the maximum loss is incurred if the underlying price is at the middle strike at expiration—representing the net cost of the position plus any commissions paid.
To practice your options trading, Tiger Trade offers a free demo account where users can explore strategies and opportunities without risk to real capital. Once you are comfortable with your strategies and want to look into diversifying your portfolio, you can trade with 4 x zero monthly brokerage for options, US or ASX stocks or ETFs*.
*New clients & unfunded existing clients only. Only min. brokerage waived for 4 ASX, US stocks or options trades. Third-party fees and other fees still apply. See T&Cs for details.
Please note that not all option strategies are available on Tiger Trade, however, have been included for education purposes.
Capital at risk. Options trading carries a high level of risk and may not be suitable for all investors. You should only trade with money you can afford to lose. See FSG, PDS, TMD and T&Cs via our website before trading. Information provided may contain general advice without taking into account your objectives, financial situations or needs. Past performance is no guarantee of future results. Graphics and charts are for illustrative purposes only. Tiger Brokers (AU) Pty Limited. ABN 12 007 268 386 AFSL 300767
