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.