Long Call Butterfly
| B/S | Strike | Type | Price |
|---|---|---|---|
| Buy 1 | $28 | Call | $2.19 |
| Sell 2 | $30 | Call | $0.86 |
| Buy 1 | $32 | Call | $0.22 |
| Net Debit | ($69) | ||
Butterfly's are three legged option combinations.
Short two ATM call options, long one ITM call option and long one OTM call option.
The Max Loss is limited to the net premium paid for the spread.
The Max Gain is limited to the ATM strike less the ITM strike less the net premium paid for the spread.
Characteristics
When to use: When you are neutral on market direction and bearish on volatility.
A long butterfly is similar to a short straddle except your losses are limited. This means that you make money when the market remains flat over the life of the options.
You might be thinking that it looks like a "short" strategy because of the similarity to the short straddle. You are right in thinking that they have similar characteristics, however, the difference between a Long Butterfly and a Short Straddle is the premium - a Long Butterfly will cost you money (or premium) to establish whereas a Short Straddle won't cost you anything as you receive money (premium) up front for putting on the position.
Long Call Butterfly Greeks
Delta
Gamma
Vega
Theta
14 Comments
Peter July 26th, 2015 at 10:33pm
Yes, you're right - I've corrected that, thanks!
asek July 26th, 2015 at 6:14pm
it seems like you have the maximum gain and maximum loss backward? Shouldn't it be the other way around?
Peter January 15th, 2012 at 5:32pm
That's right - when you're net long options your losses are limited to the premium paid.
Sam January 13th, 2012 at 3:38am
Yes I know you are net long options. But as I undrstand it if you are net long an option you can only lose what you paid and nothing more.
Peter January 10th, 2012 at 5:33am
Hi Sam,
The cash position to your broker is needed as you are net long options.
Sam January 10th, 2012 at 1:37am
Hi!
I guess you can also buy a lower call for the third leg and therefore if the price of the underlying goes beyond the third leg you can insure yourself at least some part of the profit.
The only thing I do not understand here then is why if you do this the broker wants a cash position for options requirement.
I think the situation is the same as the one on the picture above or even better because if the underlying goes up dramatically you can still ensure yourself at least some profit or at least no lose.
Tnx for your comments
Peter December 11th, 2011 at 5:06pm
You mean with the same expiration date? Well, it is "possible" but very very unlikely as the professional market makers will ensure that any arbitrage (risk-free trades) opportunities are quickly taken.
Latvian December 11th, 2011 at 3:47am
Is possible with 2 short ATM Call options cover premiums of both long Call options. So then I have open this strategy with no paying?
Manish December 5th, 2011 at 6:30am
IS IRON BUTTERFLY IS BETTER THAN BUTTERFLY? IF YES OR NO WHAT IS THE NORMAL PRICE RANGE FOR BOTH IN INDIAN STOCK CONTEXT?
akbar September 1st, 2011 at 12:03pm
ATM = at the money.
OTM= out the money.
ITM= In the money.
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