Long two ATM call options, short one ITM call option and short one OTM call option.
Maximum Loss: Limited to the net difference between the ATM strike less the ITM strike less the premium received for the position.
Maximum Gain: Limited to the net premium received for the option spread.
When to use: When you are neutral on market direction and bullish on volatility. Neutral on market direction meaning that you want the market to move in either direction - i.e. bullish and bearish at the same time.
Short Call Butterfly's have a similar pay off to the Long Straddle in that the downside risk is limited. A Short Butterfly's risk is limited to the premium paid for the three options.
Comments (2)
Peter
July 28th, 2011 at 6:23pm
For American options on stocks yes, especially as the stock approaches its ex-dividend date. Long call option holders may exercise for stock so they can receive the dividend.
shaival
July 28th, 2011 at 4:20pm
Is there any risk of getting option assigned?
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