Options Trading Strategies: Short Butterfly Calls

A short 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.

A short butterfly spread with calls is identical to the short butterfly with puts, only instead of puts you use all calls, and the opposite to the long butterfly with calls strategy.

You can look at a short butterfly spread with calls as a combination of a bear call spread (ITM short call + ATM long call) and a bull call spread (OTM short call + ATM long call).

When to use this strategy?

You are neutral on the market movement and bullish on the volatility so you are expecting a BTC/ETH price movement outside the range of the highest and lowest strike price and want to earn a profit if the BTC/ETH makes a drastic move in either direction.

Below is a Profit and Loss chart example of a short butterfly with puts options strategy:

Pros:

Maximum loss is capped.

Cons:

The higher profit potential comes with a wider range between the strikes, which widens the spread lowering your probability for profit. The amount of the potential loss is bigger than the amount of the potential profit.

Example:

In this example, BTC is trading at 36,568.41 USD and you expect its price to dramatically move in either direction. You have sold an ITM call with a strike price of 36,000.00 USD, bought two ATM calls with with a strike price of 37,000.00 USD, and sold an OTM call with a strike price of 38,000.00 USD, all with an expiration date of January 30^th 2022.

As this is a net credit spread and the long puts cost you less than a premium from the short puts you have received a net premium of 662.15 USD, which is also you maximum profit in this combination.

The Profit and Loss chart is given below:

Upon expiration:

If the BTC price is below the short call OTM strike price, then all calls expire worthless, and this is your maximum profit.

If the BTC price is above the short call OTM strike price and at or below the center long call ATM strike, then the OTM short call is assigned, and you are in the profit as long as the BTC price is below the first break even price.

Your maximum loss is at the center strike price and its equal the difference between the adjacent strikes minus the net premium.

If the BTC price is above the center strike and at or below the ITM short call strike, you are in the profit as long as the BTC price is above the second break even price.

If the BTC price is above the ITM short call strike, then both long calls are exercised and both short calls are assigned. The result is that 2 BTC are purchased and 2 are sold, and this is again your maximum profit.

BTC at Expiry (USD)	Payoff (USD)
36,000.00 (strike price SC ITM)	+ 662.15 (max gain)
36,226.00	+436.15
36,662.15 (break even 1)	0
36,776.00	-113.85
37,000.00 (2 x LC ATM)	-337.85 (max loss)
37,187.00	-150.85
37,337.85 (break even 2)	0
37,664.00	+326.15
38,000.00 (strike price SC OTM)	+ 662.15 (max gain)