Investment Type: Debit
Strike Prices: ITM for 1st bought leg, ATM (near the money) for sold leg, OTM for 2nd bought leg.
Expiration Month: Same expiration months for all legs and should be current month
Composition: Buy lower strike Call + Sell 2 middle strike Call + Buy higher strike Call
| Long Call Butterfly Profile Chart | ||
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Long Call Butterfly is one of the most popular among neutral strategies. It is a combination of Bull Call Spread and Bear Call Spread. This strategy requires a low cost and has a nice risk reward ratio but the stock price has to stay near the middle strike on the expiration date in order to get maximum reward.
In other words, this strategy is similar to Short Straddle without its unlimited risk component, however Long Call Butterfly has narrower range for its breakeven point.
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Entry:
Investment @ Entry = (Premium of Lower Strike Leg x No of Contracts x 100 Shares) + (Premium of Middle Strike Leg x No of Contracts x 100 Shares) + (Premium of Higher Strike Leg x No of Contracts x 100 Shares) = $10,750 + ($8,000) + $1,000 = $3,750
Breakeven Point Down = lower strike + Net Debit = $32.50 + $0.75 = $33.25
Exit: Best Case Scenario:
Profit @ Exit = (Premium of Lower Strike Leg x No of Contracts x 100 Shares) + (Premium of Middle Strike Leg x No of Contracts x 100 Shares) + (Premium of Higher Strike Leg x No of Contracts x 100 Shares) – Investment @ Entry = $12,500 + $0 + $0 - $3,750 = $8,750
Return of Investment = Profit @ Exit / Investment @ Entry = 233%
Worst Case Scenario : Investment @ Entry
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