Multi-leg strategies
What is a Long Butterfly Spread and how does it achieve massive risk-to-reward leverage?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
A Long Butterfly Spread buys one lower strike, sells two middle strikes, and buys one higher strike (same type), creating a low-cost position with high reward-to-risk if price settles near the middle strike.
How it works
Maximum loss is limited to the net debit paid, while maximum profit, reached only at the center strike at expiration, can be several times the initial cost, making the leverage ratio attractive but narrow.
An example
Buy a 95 call, sell two 100 calls, buy a 105 call for a small net debit; the biggest payoff occurs only if the stock closes precisely at $100.
Risk & limitations
The high reward-to-risk ratio reflects low probability of landing exactly at the center strike; most butterflies expire with partial or no profit, and commissions on four legs add drag.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.