LONG CALL BUTTERFLY (Butterfly Spread) | neutral strategy

Long Butterfly

Example: Sell 2 calls; buy 1 call at next lower strike; buy 1 call at next higher strike (the strikes are equidistant)
Market Outlook: Neutral around strike
Risk: Limited
Reward: Limited
Increase in Volatility: Typically hurts position
Time Erosion: Typically helps position
Break-Even Point (BEP): Two BEPs 1. Lower long call strike plus net premium paid 2. Higher long call strike minus net premium paid

Butterfly Spread
The butterfly spread is a neutral strategy that is a combination of a bull spread and a bear spread. It is a limited profit, limited risk options strategy. There are 3 striking prices involved in a butterfly spread and it can be constructed using calls or puts.

Long Call Butterfly
Long butterfly spreads are entered when the investor thinks that the underlying stock will not rise or fall much by expiration. Using calls, the long butterfly can be constructed by buying one lower striking in-the-money call, writing two at-the-money calls and buying another higher strikingout-of-the-money call. A resulting net debit is taken to enter the trade.

Iron Butterfly
The iron butterfly spread is a limited risk, limited profit trading strategy that is structured for a larger probability of earning a smaller limited profit when the underlying stock is perceived to have a low volatility.

To setup an iron butterfly, the options trader buys a lower strike out-of-the-money put, sells a middle strike at-the-money put, sells a middle strike at-the-money call and buys another higher strike out-of-the-money call. This results in a net credit to put on the trade.

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