The Weekly Strategy Discussion is designed to assist individuals in learning how
options work and in understanding various options strategies. Options involve risk and are not suitable
for all investors. The strategies discussed are for educational and illustrative purposes
only, and should not be construed as an endorsement, recommendation or solicitation to buy or
sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.
Long Call Butterfly
Example: XYZ stock is trading at $40
Outlook: You are neutral on XYZ stock for the short term.
Possible strategy: Construct the Long Call Butterfly to take advantage of short term time decay.
Buy one 30 strike call at $11.00
Sell two 40 strike calls at $4.00
Buy one 50 strike call at $1.00
Net Debit $4.00
- Maximum Profit = ATM strike - ITM strike - Net Debit
- Maximum Profit = 40 - 30 - $4.00 = $6.00
- Maximum Loss = Net Debit ($4.00)
- Breakevens = Higher strike Call - Net Debit
50 - 4 = 46
Lower strike Call + Net Debit
30 + 4 = 34
In Summary: Option traders will establish a Butterfly when they anticipate minimal movement in the stock within a specific time frame. The Long Call Butterfly is a limited risk and limited profit strategy. It is most profitable if XYZ stabilizes to the at-the-money strike at expiration.