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 Outlook
Neutral around Strike
Summary
This strategy generally profits if the underlying stock is at the body of the butterfly at expiration.
Breakeven:
· Upside Breakeven = Higher Strike less Net Premium Paid
· Downside Breakeven = Lower Strike add Net Premium Paid.
Advantages and Disadvantages
Advantages:
· 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.
Disadvantages:
· 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
