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Main Menu > Strategies > Butterfly Strategies > Long call butterfly

Last Updated: 9:15 AM 09 APR

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A long call butterfly is an options strategy involving buying one out-of-the-money (OTM) call option, selling two at-the-money (ATM) call options, and buying one in-the-money (ITM) call option, all on the same underlying asset with the same expiration date. The strike prices are arranged sequentially, with the OTM strike being the lowest, followed by the two ATM strikes, and finally the ITM strike being the highest.

**Limited Profit Potential: ** Profits are capped by the difference between the ITM strike price and the OTM strike price minus the net premium paid (buying premium minus selling premium).

**Limited Risk: **Maximum loss is defined and limited to the net premium paid.

**Neutral to Slightly Bullish Outlook: **This strategy assumes the asset price will remain stable or moderately decline within a defined range.

**Benefits from Low Volatility: **Profits are maximized when the underlying asset price stays close to the ATM strike price, making it vulnerable to losses in highly volatile markets.

**Buying the OTM Call: **Grants you the right (but not the obligation) to buy the asset at the OTM strike price by the expiration date. If the
price falls significantly, you might exercise the option to buy at a lower price than the market price, leading to a profit.

**Selling Two ATM Calls: **Generates premium income but creates the risk of being assigned to sell the asset at the ATM strike if the price stays stable or increases moderately.

**Buying the ITM Call: **Offsets the risk of assignment from selling the ATM calls and provides potential for profit if the price falls significantly below the ITM strike price.

The asset price stays near the ATM strike price throughout the option's life. You lose the net premium paid, resulting in a small loss.

The asset price decreases moderately, exceeding the ITM strike price but staying above the OTM strike. You can exercise the ITM call for profit, offset by the loss from assigning one of the ATM calls, resulting in a net profit from the spread.

The asset price falls significantly below the OTM strike price. You keep the premium collected on the OTM call without needing to exercise it, resulting in a maximum profit.

The asset price stays above the ITM strike price throughout the option's life. You lose the entire net premium paid.

The asset price rises significantly above the ATM strike price and you are assigned to sell the asset at a lower price than the market price, leading to a significant loss.

This strategy is suitable for investors who:

- Expect a stable or slightly bearish market movement for the underlying asset..
- Seek limited risk with defined potential losses.
- Are comfortable with a capped profit potential in exchange for lower risk.
- Understand the risks involved in options trading and have a moderate tolerance for potential losses.

- Offers lower risk than a naked call option but also has lower profit potential.
- Requires a neutral to slightly bearish outlook compared to a bullish outlook for a long put butterfly.
- Is more sensitive to low volatility for higher profits compared to strategies benefiting from high volatility.

Remember, any option strategy involves inherent risks. Choose this strategy cautiously after considering your investment goals and risk tolerance.

The break-even point for an option strategy is the underlying asset price at the expiration date where the strategy neither makes a profit nor suffers a loss. It takes into account the combined costs and potential payoffs of all options involved in the strategy.

In options trading, the probability of profit (POP) reflects the likelihood of your chosen strategy resulting in a profitable outcome by the expiration date. While it's not a foolproof indicator, it can be a helpful tool for assessing potential risk and reward scenarios.

The risk-reward ratio is a crucial concept in options trading, helping you assess the potential profit compared to the potential loss of a particular strategy. It doesn't guarantee success, but it provides a valuable framework for informed decision-making.

- Divide the expected profit if the strategy is successful by the maximum possible loss.
- Higher ratios (e.g., 3:1) generally indicate more favorable risk-reward profiles, but they might also signal lower potential profits.
- Lower ratios (e.g., 1:2) could suggest higher potential profits, but also come with greater risk of substantial losses.

A long put butterfly is an options strategy involving buying one in-the-money (ITM) put option, selling two at-the-money (ATM) put options, and buying one out-of-the-money (OTM) put option, all on the same underlying asset with the same expiration date. The strike prices are arranged sequentially, with the ITM strike being the lowest, followed by the two ATM strikes, and finally the OTM strike being the highest.

**Limited Profit Potential: ** Profits are capped by the difference between the ITM strike price and the OTM strike price minus the net premium paid (buying premium minus selling premium).

**Limited Risk: **Maximum loss is defined and limited to the net premium paid.

**Neutral to Slightly Bearish Outlook: **This strategy assumes the asset price will remain stable or decline moderately within a defined range.

**Benefits from Low Volatility: **Profits are maximized when the underlying asset price stays close to the ATM strike price, making it vulnerable to losses in highly volatile markets.

**Buying the ITM Put: ** Grants you the right (but not the obligation) to sell the asset at the ITM strike price by the expiration date
If the price falls significantly, you can exercise the option to sell at a higher price than the market price, leading to a profit.

**Selling Two ATM Puts: **Generates premium income but creates the risk of being assigned to buy the asset at the ATM strike if the price stays stable or increases moderately.

**Buying the OTM Put: **Offsets the risk of assignment from selling the ATM puts and provides potential for profit if the price falls significantly below the OTM strike price.

The asset price stays near the ATM strike price throughout the option's life. You lose the net premium paid, resulting in a small loss.

The asset price decreases moderately, exceeding the OTM strike price but staying above the ITM strike. You can exercise the OTM put for profit, offset by the loss from assigning one of the ATM puts, resulting in a net profit from the spread.

The asset price falls significantly below the OTM strike price. You keep the premium collected on the OTM put without needing to exercise it, resulting in a maximum profit.

The asset price stays above the ITM strike price throughout the option's life. You lose the entire net premium paid.

The asset price rises significantly above the ATM strike price and you are assigned to buy the asset at a higher price than the market price, leading to a significant loss.

This strategy is suitable for investors who:

- Expect a stable or slightly bearish market movement for the underlying asset..
- Seek limited risk with defined potential losses.
- Are comfortable with a capped profit potential in exchange for lower risk.
- Understand the risks involved in options trading and have a moderate tolerance for potential losses.

- Offers lower risk than a naked put option but also has lower profit potential.
- Requires a neutral to slightly bearish outlook compared to a bullish outlook for a short put butterfly..
- Is more sensitive to low volatility for higher profits compared to strategies benefiting from high volatility.

Remember, any option strategy involves inherent risks. Choose this strategy cautiously after considering your investment goals and risk tolerance.

Moneyness describes the relationship between the strike price of an option and the current market price of the underlying asset. It tells you whether the option is currently in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM).

If the value of moneyness in -ve it implies that the strike is an OTM strike on the other hand, +ve moneyness implies ITM strike. Also, higher the value of moneyness higher the distance between strike and ATM.

In options trading, the probability of profit (POP) reflects the likelihood of your chosen strategy resulting in a profitable outcome by the expiration date. While it's not a foolproof indicator, it can be a helpful tool for assessing potential risk and reward scenarios.

In options trading, the probability of profit (POP) reflects the likelihood of your chosen strategy resulting in a profitable outcome by the expiration date. While it's not a foolproof indicator, it can be a helpful tool for assessing potential risk and reward scenarios.

The risk-reward ratio is a crucial concept in options trading, helping you assess the potential profit compared to the potential loss of a particular strategy. It doesn't guarantee success, but it provides a valuable framework for informed decision-making.

- Divide the expected profit if the strategy is successful by the maximum possible loss.
- Higher ratios (e.g., 3:1) generally indicate more favorable risk-reward profiles, but they might also signal lower potential profits.
- Lower ratios (e.g., 1:2) could suggest higher potential profits, but also come with greater risk of substantial losses.

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