Enter the higher strike price, lower strike price, and premium into the calculator to determine the butterfly spread maximum profit per option.
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Butterfly Spread Profit Formula
The following formula is used to calculate the maximum profit of a butterfly spread.
MP = HS - LS - P
- Where MP is the maximum profit per contract ($)
- HS is the higher strike price ($)
- LS is the lower strike price ($)
- P is the premium paid ($)
To calculate the butterfly spread profit, subtract the lower strike price and the premium from the highest strike price.
What is a butterfly spread?
Definition:
A butterfly spread is a financial strategy that combines both bull and bear spreads together to create an investment that has a fixed risk but also a maximum profit.
How to calculate butterfly spread profit?
Example Problem:
The following example outlines how to calculate the maximum profit of a long butterfly spread.
First, determine the lowest strike price. In this example, the low strike price is $5.00.
Next, determine the higher strike price. The highest strike price in this spread is $12.50.
Next, determine the average premium paid. The average premium for this problem is $2.00.
Finally, calculate the maximum profit per contract using the formula above:
MP = HS – LS – P
MP = 12.50 – 5.00 – 2.00
MP = $5.50.00
