Weekly Strategy Discussion

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 $9.82 

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 weekly 9 strike call at   $1.25

                                 Sell two weekly 10 strike calls at $.55 ($1.10) 

                                 Buy one weekly 11 strike call at  $.15

                                                       Net Debit             $.30   

At Expiration:

  • Maximum Profit = ATM strike - ITM strike - Net Debit
  • Maximum Profit = 10 - 9 - $.30 = $.70
  • Maximum Loss = Net Debit ($.30)
  • Breakevens = Higher strike Call - Net Debit

                                         11 - .30 = 10.70

                                    Lower strike Call + Net Debit

                                         9 + .30 = 9.30

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.     

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