A butterfly spread combines three strikes: you buy one option below, sell two at a middle strike, and buy one above — all the same type and expiration. The result is a cheap, defined-risk position that pays off best if price lands right at the middle strike at expiration.

The payoff shape

The profit profile looks like a tent: maximum gain if price finishes exactly at the middle strike, tapering to zero (and a small capped loss) as price moves away in either direction. Because you sell two options against the two you buy, the net cost is low, so a small outlay can produce a large payoff if your target is hit.

High reward, low probability

The catch is precision. Butterflies pay handsomely only in a narrow zone around the target strike, and price rarely lands exactly where you want. The reward-to-risk looks spectacular, but the probability of the max payoff is low. It's a lottery-ticket-shaped bet with defined risk — attractive odds only if you have a genuine reason to expect a specific level (like a pinning strike into expiration).

A butterfly offers a big payoff for a small cost — because it's betting on a bullseye, not a barn door.

Where it fits

Butterflies suit a high-conviction view that price will gravitate to (and pin near) a specific strike — the kind of setup gamma pinning can create around big open-interest strikes into expiration. They're a precision instrument: cheap, defined-risk, and usually worthless unless the target is nailed. Know you're paying for a pinpoint outcome.