Name: Long Butterfly w/ Calls
Description: The butterfly combines two vertical spreads where the Strike B is the same in both. This is a neutral strategy where you hope the underlying finishes at Strike B. The profit in these positions can be a plus, however, getting the underlying to fall on Strike B is difficult
Setup: Buy (long) Strike A call and Sell (short) 2 Strike B calls and Buy (long) Strike C call
Break-Even: Two breakeven points:
Max Profit: Limited: Strike B – Strike A – Debit paid
Max Loss: Limited: Debit paid
Margin: No margin required
Time Decay: Time decay is a positive effect as you want the underlying to remain trapped between the strikes. You are looking for all options but the long call on Strike A to expire worthless
Implied Volatility: If the underlying is within Strike A and Strike C you want implied volatility to decrease. This will decrease the value of your options so they expire worthless but it will also reduce the possibility of a large movement (something you don’t want). If the underlying is outside Strike A or Strike C then you want implied volatility to increase so it will increase the value of your options.
Notes: This is typically a neutral play but you can place directional bias on it by picking strikes that are out of the money.
Featured in Trade Review: None at this time
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