Short Call Butterfly is another volatility strategy and is the opposite of a
Long Call Butterfly, which is a rangebound strategy. The reason that short butterflies
are not particularly popular is because even though they produce a net credit,
they offer very small returns compared to straddles and strangles with only
Short Call Butterfly involves a low strike short call, two ATM long calls, and
an out-of-the-money short call. The resulting position is profitable in the
event of a big move by the stock. The problem is that the reward is seriously
capped and is typically dwarfed by the potential risk if the stock fails to
this strategy when you anticipate a stock moving with increasing volatility, in
either direction, for a capital gain.
is trading at $50 on May 14, 2011.
August 2011 45 strike call for $7.98.
two August 2011 50 strike calls at $5.28.
August 2011 55 strike call for $3.35.
Credit: premiums sold minus premiums bought = $0.77
benefit is that, with no capital outlay, you can profit from a rangebound stock
with capped risk and the possibility of big profit if the stock moves
risk is the difference between adjacent strikes minus the net credit. The
reward is the net credit you received.
between adjacent strikes minus net credit.
even up: higher strike minus net credit.
even down: lower strike plus net credit.
is positive for this position, unless the stock moves outside the outer
Of Time Decay
It harms the position since you are looking for a lot of movement in the stock
stem a loss, you can close out your position before expiration.
out the spread by selling the options you bought and buying back the options