Long Call Butterfly is one of the sideway strategies employed in a low volatile stock. It usually involves buying one lower strike call, selling two middle strike calls and buying one higher strike call options of the same expiration date. Typically the distance between each strike prices are equal for this strategy.
Combining two short calls at a middle strike and one long call each at a lower and upper strike creates a long call butterfly. The upper and lower strikes (wings) must both be equidistant from the middle strike (body), and all the options must have the same expiration date.
You may also execute the Long Butterfly strategy using all puts options. When all puts options are used, it is referred to as the Long Put Butterfly strategy. As to whether a butterfly strategy should be executed using all calls or all put options depend on the relative price of the option. The premium of both puts and calls option should be taken into consideration to achieve the optimum trade
Market OutlookNeutral around Strike
This strategy generally profits if the underlying stock is at the body of the butterfly at expiration.
· Upside Breakeven = Higher Strike less Net Premium Paid
· Downside Breakeven = Lower Strike add Net Premium Paid.
Advantages and Disadvantages
· Ability to make profit from a range bound stock with relatively lower cost outlay.
· Limited risk exposure compare to Short Straddle strategy when the underlying stock moved beyond the breakeven point on expiration date.
· The profit potential only come from the narrow range between the 2 wing strikes.
· Bid/Ask spread from the various option legs may adversely affect the profit potential of the strategy