Long Call Butterfly

Long Call Butterfly Option Strategy Graph

B/SStrikeTypePrice
Buy 1$28Call$2.19
Sell 2$30Call$0.86
Buy 1$32Call$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

Long Call Butterfly Delta Graph - 30 Days to ExpirationLong Call Butterfly Delta Graph - 3 Days to Expiration

Gamma

Long Call Butterfly Gamma Graph - 30 Days to ExpirationLong Call Butterfly Gamma Graph - 3 Days to Expiration

Vega

Long Call Butterfly Vega Graph - 30 Days to ExpirationLong Call Butterfly Vega Graph - 3 Days to Expiration

Theta

Long Call Butterfly Theta Graph - 30 Days to ExpirationLong Call Butterfly Theta Graph - 3 Days to Expiration

14 Comments

Peter August 7th, 2011 at 7:32am

Please see the in-the-money page.

subhra August 5th, 2011 at 9:15am

what is ATM call options ?
what is ITM call option ?
what is OTM call option ?

Pankaz December 16th, 2008 at 2:31am

Nitesh's comment is dumb. The max loss is the same on both of his described cases, whether st. price is over OTM or below ITM. and
And for Max gain, The max gain is at one point only, not between the two strike prices.

Nitesh August 25th, 2008 at 7:25am

Hi,

I guess under Maximum Loss it should be: If the stock price exceeds OTM call Option on expiry or if the stock price reduces less then ITM call option on expiry.

And Maximum Gain: If the stock price is at ATM on expiry or if the stock price is between ITM & OTM call option on expiry

Just an comment, to make it simple. In Maximum Gain I guess it couldn't be Limited to the premium received as in geneal buying both ITM and OTM call option will cost more then selling two ATM call option

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