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 August 23rd:
The screener shows some interesting long call butterfly trades on popular stocks such TSLA, NVDA, PYPL and AAPL.
Let’s take a look at the first line item – a Long Call Butterfly on Tesla.
Using the August 25 expiry, the trade would involve buying the $212.50 strike call, selling two of the $242.50 strike calls and buying one of the $272.50 strike calls. The cost for the trade would be $1,826 which is the most the trade could lose. The maximum potential gain is $1,174. The lower breakeven price is $230.76 and the upper breakeven price is $254.24. The maximum profit is 64.29% with a probability of success of 53.2%.
The Barchart Technical Opinion rating is a 40% Buy with a weakening short term outlook on maintaining the current direction. Long term indicators fully support a continuation of the trend.
PYPL Long Call Butterfly Example
Let’s take a look at another example, this time on PayPal.
Also using the August 25 expiry, the trade would involve buying the $58 strike call, selling two of the $61 strike calls and buying one of the $64 strike calls. The cost for the trade would be $163 which is the most the trade could lose. The maximum potential gain is $137. The lower breakeven price is $59.63 and the upper breakeven price is $62.37. The maximum profit is 84.05% with a probability of success of 49.2%%.
The Barchart Technical Opinion rating is a 100% Sell with an Average short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
These two trades were very short-term, so it might be worth adjusting the days to expiration range to 15 to 60. That produces the following results:
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.
