Option Strategies Details
Buy one OTM Call, sell two further OTM Calls, buy one even further OTM Call
1. Speculate on a precise increase in price at expiration and flat to decreasing volatility
Flat
Up
Lowest strike plus debit paid or highest strike minus debit paid
Cost of the Long Call Butterfly
same as Max Contract Loss
Long Call Butterfly
Other names
You buy (long) one OTM Call, sell (short) two further OTM Calls, buy (long) one even further OTM Call
Description
A trader who forecasts a precise increase to a certain price range and flat to decreasing volatility can buy a Long Call Butterfly. The trader pays a small debit for the whole position, called a premium.
Suppose stock XYZ is trading at $139. You forecast an increase in XYZ price to between $145 and $155 with high confidence that it will be at $150 at the next monthly expiration, and you forecast no change to volatility.
You open a $145 / $150 / $155 Long Call Butterfly (buying the $145 Call, selling two (2) $150 Calls, and buying the $155 Call) for a $0.57 debit. Your breakeven prices at expiry are $145.57, the nearest long Call plus the debit, and $154.43, the farthest long Call minus the debit. Your max profit is $4.43, the distance from the "wing" to the "body" of the Long Call Butterfly, minus the debit paid. It is important to remember that this max profit occurs at expiry only, since most of the value of the Long Call Butterfly is realized as the sold Calls decay into expiration. Compared to other structures, the Long Call Butterfly is very rigid with respect to time, since if your target price is achieved much faster than expected, the resulting position profit will be underwhelming.