A long call butterfly buys one call at a lower strike, sells two calls at a middle strike, and buys one call at a higher strike, all with the same expiry and equal spacing.
Example
The stock is at 100. You buy the 95 call, sell two 100 calls and buy the 105 call for a net cost of 1.50.
- Maximum profit: 5 – 1.50 = 3.50, if the stock ends exactly at 100.
- Maximum loss: 1.50, if it ends below 95 or above 105.
- Break-evens: 96.50 and 103.50.
When to use it
Butterflies suit a view that price will settle near a specific level by expiry. They are cheap and have defined risk, but the full profit only comes in a narrow zone and usually only very close to expiry.
This article is for education only and is not financial advice. Options involve risk and are not suitable for every investor.