Long Call Butterfly is another rangebound strategy and is the opposite of a
Short Call Butterfly, which is a volatility strategy.
butterflies are quite popular because they offer a good risk/reward ratio,
together with low cost. The long options at the outside strikes ensure that the
risk is capped on both sides, and this is a much more conservative strategy
than the Short Straddle.
Long Call Butterfly involves a low strike long call, two at-the-money short
calls, and an out-of-the-money long call. The resulting is profitable in the
event of rangebound action by the stock. Although the risk/reward ratio is
attractive, the problem is that the maximum reward is restricted to the
scenario where the stock is at the middle strike at expiration.
neutral. You expect little movement in the price of the stock.
this strategy when you expect the stock not to move very much, and can execute
a high-yielding trade at low cost for capital gain purposes.
is trading at $50 on May 12, 2011.
June 2011 45 strike call for $6.12.
two June 2011 50 strike calls at $3.07.
June 2011 55 strike call for $1.30.
benefit is that, for little monetary outlay, you can profit from a rangebound
stock with capped risk.
risk is the net debit of the options you bought and sold. The reward is the
difference between adjacent strikes minus the net debit.
difference between strikes minus net debit.
even up: higher strike minus net debit.
even down: lower strike plus net debit.
volatility in the stock price is what you are looking for.
Of Time Decay
when the position is profitable and negative when the position is not
profitable. Entering the trade, the stock is profitable, so from then on the
effect of time decay is negative on the position.
the position if the stock moves outside of the stop loss areas below or above
the stock price.
can unravel it just before expiration.
out the position by buying back the options you sold and selling the options