Theta changes at
an exponential rate. In English, that means that the time value of any options
you’re holding will decay more quickly the closer those options are to
expiration. If you’re an option buyer, that means you want the move in the
underlying to happen sooner rather than later, because even if you’re right
about the direction of an underlying, those long calls you bought last month
might still be losers even if your stock makes a big move today, because once
you’re close to expiration there will be very little time premium left in those
Short two calls at the middle strike, and long one call each
at the lower and upper strike. The upper and lower strikes (wings) must
both be equidistant from the middle strike (body), and all the options must be
the same expiration.
The maximum loss would occur should the underlying stock be
outside the wings at expiration.
The maximum profit would occur should the underlying stock
be at the middle strike at expiration.
The potential profit and loss are both very limited. In
essence, a butterfly at expiration has a minimum value of zero and a maximum
value equal to the distance between either wing and the body. An investor
who buys a butterfly pays a premium somewhere between the minimum and maximum
value, and profits if the butterfly's value moves toward the maximum as