Name: Long Butterfly w/ Calls

Setup: Buy (long) Strike A call and Sell (short) 2 Strike B calls and Buy (long) Strike C call

Bias: Neutral

 

Break-Even: Two breakeven points:

 

  • Strike A minus debit paid
  • Strike C plus debit paid

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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