Options Trading Strategies: Long Butterfly Calls
A long butterfly spread with calls is a four legged and three strikes strategy, created by selling one In The Money call, buying two At The Money calls, and selling one more Out of The Money call. All calls are with the same expiration date and the two short call strikes are equidistant to the middle strike.
The long butterfly with calls strategy is identical to the long butterfly with puts, only instead of puts you will use all calls, and the opposite to the short butterfly with calls strategy.
You can look at a long butterfly spread with calls as a combination of a bull call spread (long ITM call + ATM short call) and a bear call spread (long OTM call + ATM short call).
When to use this strategy?
You are neutral to moderately bullish, and bearish on the volatility, so you are expecting a minimal BTC/ETH price movement, and want to earn a profit if the BTC/ETH stagnates or moves minimally.
Below is a Profit and Loss chart example of a long butterfly with calls options strategy:
Pros:
Maximum loss is capped and low.
Cons:
The higher profit requires a narrow range between the wing strikes.
Maximum profit is restricted to the scenario where the BTC/ETH price is at the middle strike at expiration.
Example:
In this example, BTC is trading at 37,165.47 USD and you expect its price to stagnate or move moderately. You have bought an ITM call with a strike price of 36,000.00 USD, sold two ATM calls with with a strike price of 37,000.00 USD, and bought an OTM call with a strike price of 38,000.00 USD, all with an expiration date of February 1st 2022.
As this is a net debit spread, and the long calls cost you more than a premium from the short calls you have paid a net premium of 401.96 USD, which is also your maximum loss in this combination.
The Profit and Loss chart is given below:
Upon expiration:
If the BTC price is below the ITM long call strike price, then all calls expire worthless, no position is created, and you are at your maximum loss.
If the BTC price is above the ITM long call strike and at or below the center ATM strike, the ITM long call is exercised, you are in the profit as long as the bitcoin price ends up above the first break-even price.
If the BTC price is at the center strike, your maximum profit is realized, and it is equal to the difference between the adjacent strikes minus the net premium.
If the BTC price is above the center strike and at or below the OTM long call strike, the ITM long call is exercised and the two ATM short calls are assigned, you are in the profit as long as the bitcoin price ends up below the second break-even price.
If the BTC price is above the OTM long call strike, then both long calls are exercised and the two short calls are assigned, no position is created, and you are at your maximum loss.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 36,000.00 (strike price LC ITM) | -401.96 (max loss) |
| 36,205.00 | -196.96 |
| 36,401.96 (break even 1) | 0 |
| 36,681.00 | +279.04 |
| 37,000.00 (2 x SC ATM) | +598.04 (max gain) |
| 37,299.00 | +299.04 |
| 37,598.04 (break even 2) | 0 |
| 37,801.00 | -202.04 |
| 38,000.00 (strike price LC OTM) | -401.96 (max loss) |