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Deconstructing the Butterfly and How to Create 10-to-1 Reward-Risk

by | Oct 31, 2025

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We start the week looking at the market from the top down. I’ll walk through the major indexes, economic themes, currencies and internals like advanced-decline lines and breadth. The goal is to set expectations for the week ahead and identify directional bias before the real trading action begins.

 

I want to walk you through something that looks complicated on the surface but is actually pretty straightforward once you see how the pieces fit together.

The butterfly spread has a reputation for being complex, but here’s the truth — it’s just two basic spreads combined to create a defined-risk, high-reward structure targeting a specific price level. And when you understand the mechanics, you’ll see why this setup can deliver 10-to-1 reward-risk ratios with complete downside protection.

Let me break down exactly how this works.

Building Block One: The Bull Call Spread

Let’s say you buy a 6,885 call and sell a 6,900 call on SPX. What does that give you?

This is a debit spread because the 6,885 call you’re buying is closer to the actual price, so it costs more than the 6,900 call you’re selling, which is farther away. That’s the first part — a small debit with a large reward opportunity.

But we’re not done. There’s another part to this trade that completes the structure.

Now you add the second piece: You sell another 6,900 call and buy a 6,915 call. This creates a bear call spread. You’re selling something closer to current price and buying something farther away, so you collect more credit than you pay in debit — making this a credit spread with higher risk.

How the Two Pieces Create Asymmetric Returns

Here’s where it gets interesting. When you combine these two spreads together, you get a butterfly: You buy the 6,885 call with one contract, sell the 6,900 call with two contracts, and buy the 6,915 call with one contract.

The entire structure is entered as a debit spread — typically costing somewhere between 90 cents and $1.60 depending on the width of your strikes.

The beauty of this setup is the math. If you’re working with a 10-point width, your maximum profit is $10 minus whatever you paid to enter the trade. So if you paid 90 cents, your max profit is $9.10 — giving you that 10-to-1 reward-risk profile.

And here’s what makes this so powerful: Your risk is completely defined — you can only lose the debit you paid to enter. No surprises, no unlimited downside. You know exactly what you’re risking, and you’re positioning for asymmetric reward if price lands anywhere near your target strike.

This isn’t about guessing the exact price. It’s about identifying a high-probability zone — maybe based on gamma levels or technical analysis — and structuring a trade that pays you handsomely if you’re even close to right.

That’s the power of understanding how these spreads work mechanically. Once you see the two building blocks, the butterfly stops being intimidating and starts being one of the most elegant risk-reward setups available.

I’ll see you in the markets.

Chris Pulver
Chris Pulver Trading 

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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk. 

P.S. The ‘Liquidity Levels’ Wall Street Hides From You

The stock market’s a gamble — even Warren Buffett called it a casino.

But here’s the catch…

With enough money, you can make yourself right even when you’re wrong.

Stock prices move on sentiment — and the billions behind it. Confidence brings massive buy orders, prices rise. Fear brings sell orders, prices fall. It’s not emotion that moves markets — it’s liquidity.

You and I don’t have hundreds of billions to throw around. So the key is getting on the side of the market makers who do.

Using today’s trading tech, you can now spot where those big players hide massive buy orders — what I call “Liquidity Levels.” When price hits them, it can spark a 24-hour rally.

I recently hosted a live session showing how to identify these levels. While I can’t guarantee profits or prevent losses…

You Can Watch the Broadcast Here!

We develop tools and strategies to the best of our ability but no one can guarantee the future. There is always a risk of loss when trading. Past performance is not indicative of future results. From 9/18/24 – 10/23/2025 we have seen a 57% win rate on live trades with a 18% average return (winners and losers) and a 91% average winner with a hold time of less than 24 hours.

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