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Modified Call Butterfly




The Modified Call Butterfly is identical to the Long Call Butterfly with the exception that the distance between the middle and higher strike calls is closer than that of the lower and middle strikes.


The net effect of this is that the position changes to a rangebound strategy with a bullish bias. As such, we make our biggest profits if the stock remains around the middle strike, but we can still make a profit if the stock breaks to the upside.


This is a fiddly strategy and should only be used if you have an analyzer handy. otherwise, it would be easy to miscalculate your risk profile. But in terms of its usefulness, the Modified Butterfly is extremely useful for butterfly enthusiasts who need some flexibility.


The Modified Call Butterfly involves a low strike long call, two ATM short calls, and an OTM long call. The resulting position is profitable in the event of rangebound or rising action by the stock. Although the risk/reward ratio is attractive, the problem remains that the maximum reward is restricted to the scenario where the stock is at the middle strike at expiration.


Market Opinion


Neutral to moderately bullish.


P/L Profile



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When To Use


Use this strategy if you want a capital gain, when your maximum profits are when the stock hits the middle strike price at expiration. Use when you are expecting low volatility in the stock price.




XXXX is trading at $50.00 on May 9, 2011.

Buy the June 2011 45 strike call for $6.12.

Sell two June 2011 55 strike calls at $1.30.

Buy the June 2011 60 strike call for $0.50.




For very little cost, benefit when the stock moves sideways or upwards.


Risk vs. Reward


Risk equals the net debit of the bought and sold options. The reward is the difference between the lower and middle strikes minus the net debit.


Net Upside


Middle strike price minus lower strike price minus net debit.


Net Downside


A large dollar risk compared to the maximum profit potential.


Break Even Point


Lower strike plus net debit.


Effect Of Volatility




Effect Of Time Decay


Positive when the position is profitable and negative when the position is unprofitable.


Alternatives Before Expiration


If the stock drops under the stop loss below the current stock price, you can unravel the entire position.


Alternatives After Expiration


Close the position by buying back the options sold and selling the options bought.



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