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 October 9th:
The screener shows some interesting long call butterfly trades on popular stocks such AAPL, NVDA, AMD, AMZN and PLTR.
Let’s take a look at the first line item – a Long Call Butterfly on Apple.
Using the November 15 expiry, the trade would involve buying the $190 strike call, selling two of the $220 strike calls and buying one of the $250 strike calls.
The cost for the trade would be $1,466 which is the most the trade could lose. The maximum potential gain is $1,534. The lower breakeven price is $204.66 and the upper breakeven price is $235.34. The Payout Percentage is 1.05 to 1 and the Profit Probability is 56.0%.
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.
NVDA Long Call Butterfly Example
Let’s take a look at another example, this time on Nvidia.
Using the October 25 expiry, the trade would involve buying the $101 strike call, selling two of the $128 strike calls and buying one of the $155 strike calls.
The cost for the trade would be $1,652 which is the most the trade could lose. The maximum potential gain is $1,048. The lower breakeven price is $117.52 and the upper breakeven price is $138.48.
The Payout Percentage is 0.63 to 1 and the Profit Probability is 56.0%.
The Barchart Technical Opinion rating is a 88% Buy with a Strongest 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.
AMD Long Call Butterfly Example
Our final example will look at a long call butterfly on AMD.
Using the October 25 expiry, the trade would involve buying the $145 strike call, selling two of the $175 strike calls and buying one of the $205 strike calls.
The cost for the trade would be $1,720 which is the most the trade could lose. The maximum potential gain is $1,280. The lower breakeven price is $162.2 and the upper breakeven price is $187.80.
The Payout Percentage is 0.74 to 1 and the Profit Probability is 53.7%.
The Barchart Technical Opinion rating is a 24% Buy with a Average short term outlook on maintaining the current direction.
The market is in highly overbought territory. Beware 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.
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