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A long call butterfly is entered when a trader thinks a stock will not rise or fall by much between trade initiation and expiration. When using calls, the trade is constructed by buying an in-the-money call, selling two at-the-money calls and buying an out-of-the-money call. The trade is entered for a net debit meaning the trader pays to enter the trade. This debit is also the maximum possible loss.
The maximum profit is calculated as the difference between the short and long calls less the premium that you paid for the spread.
Let’s take a look at Barchart’s Long Call Calendar Screener for February 21st:
The screener shows some interesting long call butterfly trades on popular stocks such META, AMZN, DIS, AMD, PLTR and NVDA.
Let’s take a look at the first line item – a Long Call Butterfly on META.
Using the March 15 expiry, the trade would involve buying the $375 strike call, selling two of the $465 strike calls and buying one of the $555 strike calls. The cost for the trade would be $6,196 which is the most the trade could lose. The maximum potential gain is $2,804. The lower breakeven price is $436.96 and the upper breakeven price is $493.04. The maximum profit is 45.26% with a probability of success of 56.2%.
The Barchart Technical Opinion rating is a 100% Buy with a Strengthening short term outlook on maintaining the current direction. Long term indicators fully support a continuation of the trend. The market is approaching overbought territory. Be watchful of a trend reversal.
AMZN Long Call Butterfly Example
Let’s take a look at another example, this time on Amazon.
Also using the March 15 expiry, the trade would involve buying the $135 strike call, selling two of the $165 strike calls and buying one of the $195 strike calls. The cost for the trade would be $2,117 which is the most the trade could lose. The maximum potential gain is $883. The lower breakeven price is $156.17 and the upper breakeven price is $173.83. The maximum profit is 41.71% with a probability of success of 54.7%.
The Barchart Technical Opinion rating is a 100% Buy with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
DIS Long Call Butterfly Example
Our final example will look at a long call butterfly on Disney.
Also using the March 15 expiry, the trade would involve buying the $95 strike call, selling two of the $110 strike calls and buying one of the $125 strike calls. The cost for the trade would be $1,026 which is the most the trade could lose. The maximum potential gain is $474. The lower breakeven price is $105.26 and the upper breakeven price is $114.74. The maximum profit is 46.2% with a probability of success of 54.5%.
The Barchart Technical Opinion rating is a 100% Buy with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
The market is approaching overbought territory. Be watchful of a trend reversal.
Mitigating Risk
Thankfully, Long Call Butterfly Spreads are risk defined trades, so they have some built in risk management. Some trades might like to exit the trade is the upper or lower breakeven price is breached.
Position sizing is important so that a 100% loss does not cause more than a 1-2% loss in total portfolio value.
Long Call Butterfly’s can also contain early assignment risk, so be mindful of that if the short calls are in-the-money and it’s getting close to expiry.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
