Analyzing a Butterfly Spread on Microsoft

The long call butterfly spread is a defined-risk, limited-profit options strategy designed for traders who expect minimal price movement in the underlying asset.

Unlike the short call butterfly, which benefits from high volatility, the long butterfly thrives when the stock price remains near a specific level at expiration.

The long call butterfly involves three components, structured around a central strike price:

This structure creates a net debit position, meaning the trader pays a small upfront cost to establish the trade.

The ideal outcome is for the stock to expire exactly at the short strike price, allowing the trader to capture maximum profit.

The maximum profit is calculated as the difference between the short and long calls less the premium that you paid for the spread.

Let's look at some examples on Microsoft (MSFT) on the assumption we think the stock price will remain at this level for the next few weeks.

If we head over to the MSFT page, and then under Options Strategies choose Butterfly Spreads.

We are presented with 5 tabs representing the different types of Butterfly Spreads. Let's stay on the Long Call Fly tab and change the expiration date to October 16th and set Show Only to Leg2 with a Strike price of 490.

Once we hit apply, we are presented with the following potential trades:

When sorting by Profit Probability, you might notice that we have very wide Butterflies at the top. These wide butterflies have wide breakeven prices but cost a lot to enter.

The Butterfly trades at the bottom are very narrow, which makes them much cheaper but with a lower Profit Probability.

Butterfly Profit/Loss Graph, Greeks etc.

If we click on the chart icon next to the expiration date, we get a pop up window where we can preview the trade and obtain all the relevant information.

The pop up window first shows the Profit and Loss graph with the breakeven prices and profit zone.

Next, we have the volatility information:

Then, we get a visual of the Expected Move: