A long call butterfly is entered when a trader believes that a stock will not rise or fall 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, which means 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 minus the premium you paid for the spread.
Let’s take a look at Barchart’s Long Call Calendar Screener for November 23:
The screen shows some interesting long call butterfly trades on popular stocks like AAPL, META, MSFT, INTC, UBER and AMZN.
Let’s look at the first line – Long Call Butterfly at Apple.
Using the January 19th expiration, the trade would involve buying the $150 strike call, selling two of the $185 strike calls, and buying one of the $220 strike calls. The cost to the trade would be $2,264, which is the most the business could lose. The maximum potential win is $1,236. The lower breakeven price is $172.64 and the upper breakeven price is $197.36. The maximum profit is 54.59% with a probability of success of 62.5%.
The Barchart Technical Opinion rating is 56% Buy with a medium short-term outlook on maintaining the current direction. Long-term indicators fully support continuation of the trend.
META Long Call Example of a Butterfly
Let’s look at another example, this time on Meta Platforms.
Also using the December 15th expiration, the trade would involve buying the $280 strike call, selling two of the $330 strike calls, and buying one of the $380 strike calls. The cost to the business would be $3,142, which is the most the business could lose. The maximum potential win is $1,858. The lower breakeven price is $311.42 and the upper breakeven price is $348.58. The maximum profit is 59.13% with a probability of success of 57.7%.
The Barchart Technical Opinion rating is 100% Buy with a strongest short-term outlook on maintaining the current direction.
Long-term indicators fully support continuation of the trend.
MSFT Long Call Butterfly Example
Our final example will look at a long call butterfly on Microsoft.
Also using the December 15th expiration, the trade would involve buying the $330 strike call, selling two of the $370 strike calls and buying one of the $410 strike calls. The cost to the business would be $2,472, which is the most the business could lose. The maximum potential win is $1,528. The lower breakeven price is $354.72 and the upper breakeven price is $385.28. The maximum profit is 61.81% with a probability of success of 57.4%.
The Barchart Technical Opinion rating is 100% Buy with a strongest short-term outlook on maintaining the current direction.
Long-term indicators fully support continuation of the trend.
Mitigating Risk
Fortunately, Long Call Butterfly Spreads are risk defined trades, so they have some built in risk management. Some trades might like to exit the trade if the upper or lower level price is broken.
Position size is important so that a 100% loss does not cause more than a 1-2% loss in total portfolio value.
Long Call Butterfly can also contain early assignment risk, so be aware of that if the short calls are in-the-money and it’s nearing expiration.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for educational purposes only and not a business recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
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At the date of publication, Gavin McMaster did not hold (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see Barchart’s Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.