Butterfly Payoff
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When you look at a risk graph of the butterfly spread, you can see that the butterfly payoff is tremendous - especially when compared to other option income spread strategies such as the iron condor, the credit spread, the diagonal, double diagonal, the calendar, double calendar, etc.
Depending on where the wings are placed on these trades (how close or far they are purchased in relation to the strikes sold) it is possible to create a butterfly trade where the possible reward is many times the risk taken on.
However, in the instances where the reward is so many times greater than the risk, the wings are purchased very close to the sold strikes, creating a very tall yet extremely narrow ‘profit tent’ which the underlying needs to stay within in order to realize that huge payoff - which the odds will be very low.
Even so, if the underlying stays within the general vicinity of this tall, narrow profit tent - and the trader doesn’t plan to stay with the trade all the way until expriation day - a good profit can still be taken from these lower probability butterflies as the 0 day profit line rises up quite quickly and a decent return can be grabbed within a short amount of time.
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