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 Butterfly Screener for July 29th:
The screener shows some interesting long call butterfly trades on popular stocks such AAPL, AMZN, PLTR, NVDA, NOW and GOOGL.
Let’s take a look at the first line item – a Long Call Butterfly on Apple.
Using the August 21 expiry, the trade would involve buying the $280 strike call, selling two of the $340 strike calls and buying one of the $400 strike calls.
The cost for the trade would be $4,058 which is the most the trade could lose. The maximum potential gain is $1,942. The lower breakeven price is $320.58 and the upper breakeven price is $359.42. The Risk/Reward Ratio is 2.09 to 1 and the Profit Probability is 54.8%.
The Barchart Technical Opinion rating is a 100% Buy and ranks in the Top 1% of all short term signal directions.
Long term indicators fully support a continuation of the trend.
AMZN Long Call Butterfly Example
Let’s take a look at another example, this time on AMZN.
Using the July 31 expiry, the trade would involve buying the $200 strike call, selling two of the $235 strike calls and buying one of the $270 strike calls.
You will note that this is another short-term trade, which can be high risk.
The cost for the trade would be $1,993 which is the most the trade could lose. The maximum potential gain is $1,507. The lower breakeven price is $219.93 and the upper breakeven price is $250.07.
The Risk / Reward Ratio is 1.32 to 1 and the Profit Probability is 53.4%.
The Barchart Technical Opinion rating is a 8% Sell with a Weakening short term outlook on maintaining the current direction.
Amazon is due to report earnings on July 30th after the market close.
NVDA Long Call Butterfly Example
Our final example will look at a long call butterfly on Nvidia.
Using the August 21 expiry, the trade would involve buying the $150 strike call, selling two of the $197.50 strike calls and buying one of the $245 strike calls.
The cost for the trade would be $3,251 which is the most the trade could lose. The maximum potential gain is $1,499. The lower breakeven price is $1182.51 and the upper breakeven price is $212.49.
The Risk / Reward Ratio is 2.17 to 1 and the Profit Probability is 52.9%.
The Barchart Technical Opinion rating is a 32% Buy with a Weakest short term outlook on maintaining the current direction.
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 Butterflys 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.
