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.
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
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.
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.
to moderately bullish.
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.
is trading at $50.00 on May 9, 2011.
the June 2011 45 strike call for $6.12.
two June 2011 55 strike calls at $1.30.
the June 2011 60 strike call for $0.50.
very little cost, benefit when the stock moves sideways or upwards.
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.
strike price minus lower strike price minus net debit.
large dollar risk compared to the maximum profit potential.
strike plus net debit.
Of Time Decay
when the position is profitable and negative when the position is unprofitable.
the stock drops under the stop loss below the current stock price, you can
unravel the entire position.
the position by buying back the options sold and selling the options bought.