Tuesday 16 Jun 2026. The June Nifty future settled at 24,001.00. A call butterfly on the 23,800, 24,000 and 24,200 strikes cost Rs 1,800 a lot and could pay Rs 11,200, 6.2 times its cost. On Tuesday 30 Jun Nifty closed at 23,865.75, and it made Rs 2,473. Run the same shape on Wednesday 10 Jun and the index ran off the top of it: the butterfly lost its whole Rs 1,359. The broken wing version, built so that a fall cannot hurt, lost Rs 5,259 by the same 30 Jun close. That is the lesson. A butterfly is a bet on where the index finishes, not on where it goes. Every figure is an NSE end of day settlement, dated, so nothing is live and nothing says where Nifty goes next.
3By the end you can
- Build a call butterfly and a broken wing butterfly from settlement prices and read the debit or credit, breakevens, maximum gain and maximum loss.
- Explain why a tall payoff over a narrow band is cheap, and how to read the chance of landing in the band.
- Say where the risk of a broken wing sits and why it is not removed.
The idea, plainly
A butterfly is a tent. You pay a little for a payoff that peaks at one strike and falls to nothing a fixed distance either side. The tent is narrow, so it is cheap, and its peak is tall against the price. The catch is the odds of landing under the tent.
What is a long call butterfly?
Three strikes, equal gaps, one expiry. Buy a call at the lower strike. Sell two calls at the middle strike. Buy a call at the upper strike. It is two vertical spreads stacked: a bull call spread and a bear call spread that share the middle strike (module F26 builds the first). You pay a net debit. The debit is the most you can lose, and you lose it if the index ends at or beyond either outer strike. The most you can make is the strike gap less the debit, and you make it only if the index ends exactly on the middle strike.
Call butterfly
Max loss = net debit
Max gain = gap − debit
Breakevens = lower
+ debit, upper − debit
A butterfly is two vertical spreads that share the middle strike
The butterfly is a tent: it pays only when the index ends near the middle strike
Read one more paragraph, 40 words
The smooth curve is the lesson of the chart. A week before expiry the tent is low and round, and it only sharpens as time runs out. The full peak is a prize for the last day, not the first.
Why is it cheap, and what is the price of that?
It is cheap because it pays only in a narrow band. The debit was 27.70 a unit. Between the two breakevens, 23,827.70 and 24,172.30, the position gains. That band is 345 points wide. The straddle on the same chain implies a one standard deviation move of about 568 points over the same fortnight, so the band is a fraction of an ordinary move. Treat the index at expiry as lognormal at the market's own implied volatility, and the chance of finishing inside the band comes out under one in four. A tall payoff over a small chance is how any fair bet looks. It is a price, not a loophole.
A week in, an unmoved index pays more when volatility falls and less when it rises
| Move in the future | 7 days after the example date, rupees | ||
|---|---|---|---|
| IV −3 | IV same | IV +3 | |
| −2% | −680 | −435 | −422 |
| −1% | +791 | +407 | +74 |
| 0% | +1,495 | +713 | +226 |
| +1% | +528 | +231 | −48 |
| +2% | −878 | −626 | −581 |
Green is profit and red is loss; deeper colour means a larger amount. The outlined cell is the starting point.
The term this section turns on: Butterfly
Read one more paragraph, 59 words
Volatility matters too. In the grid below, read across the row where the index has not moved. The same butterfly is worth more when implied volatility falls and less when it rises, because a butterfly centred on the index is short volatility. Move the index away from the middle, up or down, and the result falls in every column.
What is a broken wing butterfly?
Move the upper wing out. Buy the lower call, sell two at the middle strike, and buy a call further from the middle than the lower one is. Now the sold calls collect more than the bought calls cost, so you start with a small credit. On the low side there is nothing to lose: every leg expires worthless and you keep the credit. All the risk has moved to the far side, where the wing is wider. The loss there is the difference between the two gaps, less the credit. A broken wing does not remove risk. It picks the side where it sits.
Call broken wing
Max loss = upper gap
− lower gap − credit
Low side: keep credit
A broken wing keeps a small gain below and carries the loss above
What are ratio spreads, backspreads and the jade lizard?
Questions about these come up beside the butterfly, so here are the plain definitions. A ratio spread buys one option and sells more than one further out, which leaves the extra sold options with no cover. A backspread is the mirror: sell one and buy more than one further out. A jade lizard is a sold put plus a sold call spread above it. When the total credit is at least the width of the call spread it has no risk on the upside, and the risk below stays open. A broken wing butterfly is a ratio spread with a far wing bought to close the open side. Module A09 works through them, and their open risk is why they sit at the advanced level.
What does it cost to run in India?
- The debit is paid upfront, as SEBI's circular of 1 Oct 2024 requires of net option premium from 1 Feb 2025. A broken wing starts with a small credit, so the broker holds margin for its larger risk instead.
- STT, at the rates in force from 1 Apr 2026: 0.15% of the premium on the two sold lots, and 0.15% of the intrinsic value on an outer leg that is exercised in the money at expiry.
- Four contracts, three strikes. The middle strike trades in a double lot, and every leg crosses its own bid and ask. On a small debit those costs are a real share of the trade.
Worked example: two shapes, two entry dates
Both chains expire on Tuesday 30 Jun 2026, settled on the index close for expiries before 7 Dec 2026. The lot is 65 units. The middle strike is the one nearest the future, because these are monthlies. The butterfly puts its outer strikes 200 points either side. The broken wing keeps the lower one and puts the upper wing 300 points out. All prices are settlement prices, not fills.
| One lot | Butterfly | Broken wing |
|---|---|---|
| 16 Jun: strikes | 23,800, 24,000, 24,200 | 23,800, 24,000, 24,300 |
| 16 Jun: pay (−) or receive (+) | −Rs 1,800 | Rs 286 |
| 16 Jun: most it makes | Rs 11,200 | Rs 13,286 |
| 16 Jun: most it loses | Rs 1,800 | Rs 6,214 |
| 16 Jun: result at the 30 Jun close | Rs 2,473 | Rs 4,560 |
| 10 Jun: strikes | 23,050, 23,250, 23,450 | 23,050, 23,250, 23,550 |
| 10 Jun: pay (−) or receive (+) | −Rs 1,359 | Rs 1,241 |
| 10 Jun: result at the 30 Jun close | −Rs 1,359 | −Rs 5,259 |
Read 2 more paragraphs, 198 words
On 30 Jun the index closed at 23,865.75, 134.25 points under the middle strike and inside the breakevens. The butterfly made Rs 2,473, which is 22.1% of its maximum. That close paid only about a fifth of the peak, which is how sharp the tent is. The broken wing, which started with a credit of 4.40 a unit, made Rs 4,560, more than the butterfly. Below the middle strike both shapes pay the same from the lower call, and the broken wing started with a credit instead of a debit.
On 10 Jun the picture reverses. Nifty rose 3.3% between the closes of 10 and 16 Jun, from 23,214.95 to 23,989.15, and kept going past both upper strikes. The butterfly lost its debit of Rs 1,359, and no more, because that is its cap. The broken wing lost Rs 5,259, 3.9 times as much. It had moved the risk from the downside to the upside, and the index went up. That is the whole trade off, shown once. It is one fortnight on two dates, and it says nothing about odds. A different pair of dates can come out the other way.
The common mistake
The belief: A butterfly costs almost nothing and pays six times, so it is a cheap way to win.
The price is low because the odds are low. The butterfly pays only if the index ends inside a band 345 points wide, and the full Rs 11,200 only on the middle strike itself. Costs weigh on a small debit too. STT on the two sold lots at entry was Rs 44.27, 2.5% of the Rs 1,800 debit, before brokerage and exchange charges. The broken wing looks safer, with no loss on the way down, and the one entered on 10 Jun lost 3.9 times what the plain butterfly lost. SEBI's Aug 2026 study of individual equity derivatives traders found that 87.7% lost money in FY26. A payoff ratio is only half a bet. The other half is the chance of getting it.
Two terms to hold on to from 17.8
Key takeaways
- A call butterfly buys one low call, sells two in the middle, buys one high.
- Net debit is the most it loses. Gap less debit is the most it makes.
- A tall payoff over a narrow band is cheap because the odds are small.
- Before expiry the tent is shallow. It sharpens only in the last days.
- A broken wing keeps a credit below and carries a bigger loss above.
- Ratio spreads and the jade lizard leave one side open: advanced.
Where this section sits in module 17.8
Before you trade. Derivatives trading carries a high risk of loss. SEBI's study "Profitability of Individual Traders in the Equity Derivatives Segment (FY25 to FY26)" (August 2026) found that 87.7% of individual traders in equity F&O made net losses in FY26, with aggregate net losses of Rs 91,685 crore. Read the SEBI study