Buy one call below, sell two at a middle strike, buy one above, all equally spaced. The debit is small and the payoff peaks at that middle strike, which is where the appeal lies: a butterfly commonly risks one to make four or five. It states a precise view about where something finishes and is cheap enough to be wrong with it repeatedly. What makes it hard is execution rather than theory — three strikes and four contracts mean four bid/ask spreads, and on a small debit those spreads are a large share of the trade. Price it here and compare the maximum profit against the spread you would really pay.
Three strikes and four contracts on one ticket — two short calls at the middle strike against one long call on each side. Equal spacing between the strikes is what keeps the payoff symmetric; an uneven spread is a different, skewed structure even though it still has three legs. Because the debit is small relative to the width, the round-trip bid/ask on four contracts is a proportionally large cost — check the combined order's mid-price against the four individual mids before assuming the displayed debit is what will actually fill.
The debit paid is the entire risk, so sizing is simple — the harder part is execution, since three strikes and four contracts routinely cost more in combined bid/ask than the theoretical debit implies on a screen showing mid-prices. Many traders wait for the debit to reach a specific level relative to the width, commonly under a fifth of it, before entering, since the position does very little until the final two weeks regardless of when it was opened. Because two contracts are sold at the same strike, some brokers report this as three legs rather than four on a trade confirmation — the position is still four contracts.
Common mistake. The common mistake is entering with a wide market on the middle strike's two contracts, paying away most of the edge in execution cost before the position has even had a chance to work.
| # | Action | Instrument | Strike |
|---|---|---|---|
| 1 | Buy | Call | 570 |
| 2 | Sell | Call ×2 | 580 |
| 3 | Buy | Call | 590 |
Computed from the same strikes and net premium as the worked example above — not a simulation, the closed-form payoff evaluated at each price.
| SPY at expiry | P&L |
|---|---|
| 560 | -$210.00 |
| 570 | -$210.00 |
| 580 | $790.00 |
| 590 | -$210.00 |
| 600 | -$210.00 |
| 610 | -$210.00 |
| Strategy | Market view | Opened for | Legs vs. this one |
|---|---|---|---|
| Call Condor | Neutral — range-bound | Debit | +1 |
| Iron Butterfly | Neutral — pinned | Credit | same |
| Calendar Spread | Neutral — long volatility of time | Debit | -1 |
| Bull Call Spread | Bullish — moderate, defined range | Debit | -1 |