Call Butterfly Strategy
Buy 1 low call, sell 2 middle calls, buy 1 high call. Profit if stock lands at middle strike.
What is a Call Butterfly?
A Call Butterfly involves three strikes: buy 1 lower-strike call, sell 2 middle-strike calls, buy 1 higher-strike call. Low cost, high reward if stock lands exactly at middle strike at expiration. Lottery-ticket style directional bet.
When to Use a Call Butterfly
Use when you have a specific price target. Best when you expect stock to settle at a specific level by expiration. Low cost entry with asymmetric payoff.
Key Formulas
- Max Profit
- (Middle - Lower strike - Net debit) × 100
- Max Loss
- Net debit × 100
- Breakeven
- Lower + net debit / Upper - net debit
Example Trade
Buy 1 AAPL $195 Call, Sell 2 $200 Calls, Buy 1 $205 Call for $1 debit. Max profit $400 at $200.
Common Mistakes to Avoid
- Expecting exact pin at middle strike (rare)
- Holding too long (need pin at expiration)
- Choosing wings too wide
- Poor liquidity on middle strike
Related Strategies
Frequently Asked Questions
What is a Call Butterfly?
A Call Butterfly involves three strikes: buy 1 lower-strike call, sell 2 middle-strike calls, buy 1 higher-strike call. Low cost, high reward if stock lands exactly at middle strike at expiration. Lottery-ticket style directional bet.
When should I use a Call Butterfly?
Use when you have a specific price target. Best when you expect stock to settle at a specific level by expiration. Low cost entry with asymmetric payoff.
What is the maximum profit and loss for a Call Butterfly?
Max profit: (Middle - Lower strike - Net debit) × 100. Max loss: Net debit × 100.
What is the breakeven price for a Call Butterfly?
Breakeven: Lower + net debit / Upper - net debit. Example trade: Buy 1 AAPL $195 Call, Sell 2 $200 Calls, Buy 1 $205 Call for $1 debit. Max profit $400 at $200.
What are common mistakes when trading a Call Butterfly?
Common mistakes include: Expecting exact pin at middle strike (rare); Holding too long (need pin at expiration); Choosing wings too wide; Poor liquidity on middle strike.
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