Butterfly option strategy is a neutral strategy. It is used when you think that the stock price will not move a lot, or trade in narrow range. The butterfly spread is a combination of a bull spread and a bear spread. The bull spread strategy is implemented by selling an in-the-money (ITM) put option and buying an out-of-the-money put option on the same stock with the same expiration date. While bear spread is implemented by selling an in-the-money call option and buying an out-of-the-money call option on the same stock with the same expiration date.

Both bull and bear spread are known credit spread where you will get income when you are using the strategy. You will get the profit by selling The amount received by selling higher strike option minus buying lower strike option.

Both bull spread and bear spread has limited profit and loss, hence the butterfly will also have limited profit, and limited risk.
Long Butterfly

There are two types of long butterfly, one constructed with call and one constructed with put. When you are constructing with Call option only, it is called long call butterfly which consist of buying one in-the-money call with lower strike price, writing two at-the-money calls and buying a out-of-the-money call which has higher strike price.

The maximum profit of a long butterfly is calculated by subtracting the difference between the two middle and lower upper strike prices. The maximum risk is limited to the net debit paid when entering the position.

The long butterfly is a strategy that takes advantage of the time decay of an option contract with limited and known risk.

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