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
- 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.