Long Butterfly
A long call butterfly buys a call, writes two calls at a higher strike and buys one more call the same distance higher again. The worked example buys the GSK September 1,900 call, writes two 2,000 calls and buys the 2,100 call for a net debit of 25.0p, £250.00 on one 1,000-share ICE contract. The most it can lose is that debit, £255.60 with the opening commission. It makes most, £750.00 before costs, if GSK finishes exactly on the 2,000p body, and nothing outside 1,900p to 2,100p. It gives up any reward for being right about direction but wrong about distance. It is built for a view that a share will be near one price on one date.
This page assumes the reader has met the long call and a vertical such as the bull call spread: a long butterfly is a bull call spread with a bear call spread written on top. Every figure is modelled, not quoted: inputs and method. GSK is a model underlying here; this is not a view on GSK.
Three GSK September calls, 100p apart
GSK options trade on ICE Futures Europe over 1,000 shares a contract, in pence, on a 0.5p tick (£5 a contract), and are American and physically settled: exercise delivers shares two business days later. ICE sets strike prices itself and publishes no interval table, so 1,900p, 2,000p and 2,100p are plausible strikes rather than a quoted chain. GSK's next ex-dividend date is 12 November 2026, after this expiry, so no dividend sits in the option's life and none of the calls is worth exercising early for one (early exercise before an ex-date). The quantities must stay 1 : 2 : 1: with more calls written than bought the position becomes a ratio spread, with open-ended risk above the top strike, which this library places at Level 3. IBKR lists long butterflies at its Options Level 3, and the written calls need a margin account (account types and permissions).
Open this worked example in the strategy builder. The builder solves each leg's volatility from the three fills.
The tent on four dates
The position makes money between 1,925p and 2,075p (1,925.56p and 2,074.44p after the opening commission), and most at 2,000p, where the payoff to the debit is 3.00 to 1. The model's one-standard-deviation range for 18 September runs from 1,799p to 2,041p, so the profitable band lies wholly above the entry price and runs past the top of that range. The model probability of any profit is 37.1%, of losing the whole debit 51.6%, and of GSK finishing within 10p of the body 5.1% (risk-neutral, lognormal, 22%; GSK is priced flat, with no skew surface in the model).
Why the tent only forms at the end
Before expiry the three calls still hold time value, and the two written calls hold the most of it. So the butterfly's value at the body rises slowly for weeks and then quickly. The chart holds GSK at four fixed prices and lets the days run out.
With GSK sitting on 2,000p the butterfly is worth 40.51p with 15 days left and 63.71p with 4 days left; the extra £232.00 per contract in those eleven days is more than the whole of the first fortnight's gain. At 2,050p the rise is slower and stops at 50p; at the 2,100p wing the value drifts up for a while and then falls to nothing. At the unchanged 1,916p it never gets far above the debit. That shape is the reason for this page's own management plan, which a debit example states for itself (teaching conventions): close when the butterfly is worth twice the debit (50.0p), close if it falls to half the debit (12.50p), and in any case close by Wednesday 16 September, before delivery week can turn it into a share position.
Where to put the body, and how wide: six versions on one chain
Moving the body down towards the share price raises the model probability of a profit and lowers the payoff; moving it up does the reverse. Narrow wings make a cheap, long-odds position (£70.00 for a 50p-wide tent) and wide ones an expensive, forgiving one. The condor row flattens the top: a £180.00 debit buys a £320.00 maximum anywhere from 1,950p to 2,050p, trading peak payoff for a wider target. The last column shows what every row has in common: weighted by the model's own probabilities, and with interest on the debit, each comes to within about £7 of zero before costs.
Two other choices move the price. Expiry: the same strikes on the October series (58 days, to 16 October) cost 19.94p at model value, less than September, but the model probability of finishing between the wings falls from 48.4% to 39.4%, because the share has longer to wander. Volatility: at 14% on every strike the September butterfly would cost 29.78p, at 30% only 20.00p. A long butterfly is short volatility; it is cheapest when the market expects large moves, which is when a target is least likely to be met. The model sheet sets no 12-month volatility range for GSK, so this page quotes no IV rank (IV rank explained).
The GSK trade from 19 August to 18 September 2026
Branch A: right, too early. GSK reaches 2,000p on Thursday 3 September
Two weeks in, GSK trades at exactly the target with 15 days left. The butterfly is worth 40.51p, a gain of £155.09 at model value, 21% of the most it can make. The twice-the-debit target has not fired: the two written calls still hold most of their time value. Sold here at 40.5p, the result is +£143.80 after all eight commissions. The position now earns £11.09 a day and has a gamma of −42 share-equivalents per 10p: a move either way costs money, and GSK has a 73.8% model probability (risk-neutral, lognormal, 22%) of still being between the wings on the 18th.
Branch B: the same price eleven days later. GSK back at 2,000p on Monday 14 September
The share price is the same as on 3 September; only the calendar has moved. With 4 days left the butterfly is worth 63.71p, a gain of £387.07 at model value, and the target fires. The closing prices are 101.0p for the 1,900 call, 19.0p for each 2,000 call and 0.5p for the 2,100 call, together 63.5p. The branch assumes GSK traded lower in between, so the butterfly stayed under its 50p target until now; had GSK sat on 2,000p throughout, the target would have fired on Thursday 10 September, 8 days before expiry, at 51.50p, a sale at 51.5p for +£253.80 after eight commissions.
Branches A and B are the lesson of this structure. Being right about the price was worth +£143.80 on 3 September and +£373.80 on 14 September. The difference is time value leaving the written calls, which is why the position's theta is £41.63 a day by the 14th against £11.09 on the 3rd. It is also why holding on is so exposed: on the 14th the gamma is −157 share-equivalents per 10p. With four days left the target is met anywhere between 1,955.5p and 2,043.5p; eleven days earlier no price met it at all, because the most the butterfly was worth on 3 September, at the body, was 40.51p.
Branch C: GSK falls to 1,850p on Thursday 3 September
The share moves away from the target. With 15 days left the butterfly is worth 11.98p, below the 12.50p stop, and selling it at 12.0p gives −£141.20. Holding to expiry at 1,850p would lose the whole debit, −£255.60 with the opening commission; from 1,850p there is an 18.5% model probability of GSK recovering into the profitable band by the 18th. The stop saves a little over £100 in this branch and costs the whole recovery case.
Branch D: right on direction, wrong on distance. GSK at 2,160p on 3 September
GSK rallies straight through the tent. The butterfly is worth 11.48p, and selling at 11.5p gives −£146.20. The 1,900/2,000 bull call spread, bought the same day for £400.00, would now be worth 98.5p, a gain of £579.40 after its four commissions. The written 2,100 cap is what separates them: a butterfly is paid for being close to a number, a vertical for being past one.
Branch E: GSK closes at 2,003p on expiry day and the position is left to settle
On Friday 18 September GSK closes at 2,003p. At the 16:30 close the butterfly is worth its intrinsic value, 97.0p, and selling it would have given +£708.80 after eight commissions. Left to settle, three things happen that no payoff diagram shows. The 1,900 call is 103p in the money and is exercised, automatically or on instruction, so the holder buys 1,000 GSK shares at 1,900p: £19,000.00 due two business days later, plus £95.00 of SDRT, because the buyer of the shares pays it (who pays SDRT). The 2,100 call lapses. And the two written 2,000 calls are only 3p in the money: each holder decides by 18:30 whether to exercise, ICE Clear Europe allocates exercises among writers at random, and the writer learns the result on Monday morning (pin risk and automatic exercise).
The same Friday close of 2,003p produces anything from +£143.20 to +£1,048.00 depending on decisions made by other people after the market shuts and on where GSK opens on Monday. The last row is a short share position the writer never chose. Closing on the Friday afternoon, or by the Wednesday as this page's plan does, removes all of it. The tax of the last row is worked below.
Greeks: a position that turns against time
At entry the butterfly is a mild bull position: 121 share-equivalents of delta, £2.23 a day of theta, −£6.66 of vega. Once GSK reaches the body the delta falls to almost nothing and the other Greeks grow: by 14 September theta is £41.63 a day and vega −£15.10 a point, and gamma is −157 share-equivalents per 10p. A long butterfly held at its target is a short-straddle position in miniature, paid by time and hurt by movement. The +1 SD column shows the opposite case: with GSK already past the body on the first day, delta turns negative. Units are explained on the Greeks page.
UK tax: three computations if closed, fewer if it settles
The two written 2,000 calls are one grant dated 19 August, adjusted by the buy-back (s148); the two bought calls are each a disposal when sold or when they lapse (s144(4)). Closed in the market, the butterfly is three computations. Figures assume the £3,000 annual exempt amount is used by other gains; the rate is 18% or 24%.
Left to settle, the options stop being separate assets. In Branch E with both written calls exercised, the bought 1,900 call becomes part of the cost of the 1,000 shares acquired on exercise (s144(3)(a)), and the two written calls' premiums become part of the proceeds of the 2,000 shares sold on assignment (s144(2)(a)); both transactions are dated 18 September, the day the options were exercised (s28). The sale of 2,000 shares is then matched in two parts: 1,000 with the shares acquired the same day, and 1,000 with the shares bought on Monday, because an acquisition within 30 days after a disposal is matched with it (s106A).
Stamp duty appears twice and counts as a cost both times: once on the shares bought by exercising the 1,900 call, once on the Monday purchase. HMRC gives no worked example of this sequence; it follows from s144(2) and (3), s28 and the matching rules (what exercise and assignment do to the share computation; 30-day matching).
Timing is the other trap. Open the same butterfly on Wednesday 17 March 2027 for the 16 April 2027 expiry (30 days, the same inputs and so the same fills) and suppose GSK falls to 1,860p by Wednesday 7 April, when the position is closed with 9 days left: the two 2,000 calls are bought back at 0.5p each, the 1,900 call is sold at 11.0p, and the 2,100 call, worth nothing on the tick, is left to lapse on the 16th. The grant, adjusted for the buy-back, is a gain of +£374.40 in 2026/27, the year it was written. The 1,900 call's sale (−£487.80) and the 2,100 call's lapse (−£46.40) belong to 2027/28. A trade that lost £159.80 overall leaves a +£374.40 gain in 2026/27, £67.39 of tax at 18% or £89.86 at 24%, and a £534.20 loss in 2027/28 carried forward: relief deferred, and lost only if never used (across 5 April; counting computations). Options cannot be held in an ISA (wrappers).
Costs: four contracts to trade, and the 100-share mini
A butterfly trades four contracts to open and four to close, so on a small debit the fixed costs are large. Commission is £11.20 round trip, 4.5% of the £250.00 debit. The bid-ask is larger still: if each call is quoted 10% wide around its price and half of that is paid each way, the round trip costs £103.00, 41.2% of the debit. On the library's 2% sizing convention, one contract with its opening commission fits an account of £12,780 (sizing framework).
GSK is one of the 22 UK names with a 100-share mini option on ICE (code 8GK, 0.25p tick, expiries in the front three months and the next three quarters). The same butterfly on the mini fills at 59.75p, 19.75p and 4.50p, a debit of £24.75 with a most-it-can-make of £75.25. The commission does not shrink with the contract: at the £1.70 fixed rate used as a placeholder (no mini rate is published), eight contracts in and out cost £13.60, 54.9% of the debit, leaving at most £61.65 against a worst case of £31.55. Exercise on the mini would deliver 100 shares with £9.50 of SDRT. The mini is listed on ICE; whether a given broker offers it and quotes a two-way price could not be confirmed (checked 26 September 2026), and contract sizes are set out on the basics page.
On a US share the same shape is 100 shares a contract and priced in dollars. On an illustrative $100 share with 30 days to run at 30% volatility, the 95/100/105 call butterfly fills at $6.60, $3.60 and $1.65 for a debit of $105.00, £77.44 at the model rate of $1.356 to the pound, with a most-it-can-make of $395.00 (£291.32) before $3.30 of commission each way (IBKR's $1.00 minimum applies to each leg of a combination order: $1.00 + $1.30 + $1.00), plus exchange and clearing fees. For UK tax each leg is converted to sterling on its own date (two dates, two rates); the US route is covered on the US options page.
A put butterfly for a target below the price
The same shape aims lower when built from puts. A GSK September 1,700/1,800/1,900 put butterfly buys the 1,900 put at 38.0p, writes two 1,800 puts at 9.0p and buys the 1,700 put at 1.0p: a debit of 21.0p, £210.00, for a most-it-can-make of £790.00 if GSK finishes at 1,800p. GSK has a 21.0% model probability of finishing within 50p of that body. The puts are American and priced on the tree; their right to early exercise is worth 0.24p across the whole butterfly, and the written 1,800 puts carry 0.05p each of it, so assignment before expiry is possible if GSK falls deep through 1,800p (early put assignment). Built from calls at the same three strikes the butterfly costs 21.0p on the same model, because the payoffs are identical and put-call parity ties the prices together; the difference is in which options are in the money, and so which can be exercised early.