uTrade Algos

What is a long call butterfly?

A long call butterfly is an options trading strategy that involves three call options with the same expiration date but different strike prices. It consists of the following positions:

  • Buy 1 In-the-Money (ITM) Call
  • Sell 2 At-the-Money (ATM) Calls
  • Buy 1 Out-of-the-Money (OTM) Call

This strategy profits from minimal movement in the underlying asset’s price, anticipating it to remain relatively stagnant around the strike prices of the sold options upon expiration.

It is initiated when the trader believes the underlying asset’s price will experience very little volatility and will stay within a confined range until the options expire. The maximum profit is achieved when the asset’s price settles precisely at the strike price of the sold ATM options at expiration. In this scenario, both the bought ITM and OTM options expire worthless, while the sold ATM options cover the cost of the purchased options, resulting in a net credit for the trader.

However, if the underlying asset’s price moves significantly away from the strike prices of the sold options, the potential loss is limited to the net debit paid to initiate the strategy. Traders need to monitor the trade carefully and consider adjustments if the market moves beyond the expected range to minimise potential losses.

To find out what is a long put butterfly click here. What is a long put butterfly?