Description:
This is a sideways strategy consisting of a long position in an OTM call option with a strike price K1 , a short position in two ATM call options with a strike price K2 , and a long position in an ITM call option with a strike price K3. The strikes are equidistant: K2 − K3 = K1 − K2 = κ. This is a relatively low cost net debit trade. The trader’s outlook is neutral. This is a capital gain strategy.
Modified Call Butterfly
This is a variation of the long call butterfly strategy where the strikes are no longer equidistant; instead we have K1 − K2 < K2 − K3 . This results in a sideways strategy with a bullish bias.
Understanding the Long Call Butterfly
The long call butterfly is an options strategy that consists of three parts: one long call in the money (Strike A), two short calls at the money (Strike B), and one long call out of the money (Strike C). All three call options have the same expiration date, and the distance between the strike prices (A, B, C) is equal, forming a symmetric position. The objective of this strategy is to profit from a stagnant price movement in the underlying asset. The long call butterfly is typically a market-neutral strategy that seeks to generate profits when the underlying stock price remains stable. The strategy can be opened as a debit spread (cost) or a credit spread (premium received), depending on the pricing of the individual options.
The principle of the long call butterfly is to profit from minimal market movement. The maximum profit is achieved when the price of the underlying asset is exactly at the strike price of the two sold calls (Strike B) at expiration. If the stock price moves significantly in either direction, the profit potential is limited. This strategy benefits from a sideways market, as the two short calls (Strike B) expire worthless, allowing the long call (Strike A) to gain value, and overall, the trader can capture a profit.