BUTTERFLY STRATEGIES Long Call Butterfly (Sell 2 ATM Call + Buy 1 ITM Call + Buy 1 OTM Call)

BUTTERFLY STRATEGIES

Long Call Butterfly (Sell 2 ATM Call + Buy 1 ITM Call + Buy 1 OTM Call)

A Long Call Butterfly is to be adopted when the investor is expecting very little movement in the stock price / index. The investor is looking to gain from low volatility at a low cost. The strategy offers a good risk / reward ratio, together with low cost. The strategy can be done by selling 2 ATM Calls, buying 1 ITM Call, and buying 1 OTM Call options.

Market Scenario: When the investor is neutral on market direction and bearish on volatility.

Risk: Net premium paid

Reward: Limited (Difference between adjacent strikes - net debit)

BEP:   Upper BEP = Strike Price of Higher Strike Long Call – Net Premium Paid

            Lower BEP = Strike Price of Lower Strike Long Call + Net Premium Paid

EXAMPLE:
Entry:

SPOT

5000

	STRIKE	PREMIUM
BUY 1 ITM CALL	4900	122
SELL 2 ATM CALL	5000	80*2 = 160
BUY 1 OTM CALL	5100	41

UPPER BEP: 5100 - 3 = 5097                                               LOWER BEP: 4900 + 3 = 4903

On Exit if:

SPOT	ITM CALL	ATM CALL	OTM CALL	STRATEGY PAY-OFF
4700	-122	160	-41	-3
4800	-122	160	-41	-3
4900	-122	160	-41	-3
4903	-119	160	-41	0
5000	-22	160	-41	97
5097	75	-34	-41	0
5100	78	-40	-41	-3
5200	178	-240	59	-3
5300	278	-440	159	-3

Long Call Butterfly - Strategy Pay-Off