Short call butterfly. Key Points. A short butterfly spread is a breakout strategy—appropriate when you expect a large movement in the underlying security either up or down over the life of the options. This three-legged strategy involves three different strike prices established in a 1/2/1 ratio. A short butterfly can be built with either calls or puts.

Short call butterfly

Options Workshop: Short Call Butterfly With Eric "The Wolfman" Wilkinson

Short call butterfly. A long call butterfly spread is a seasoned option strategy combining a long and short call spread, meant to converge at a strike price equal to the stock.

Short call butterfly


The short butterfly is a neutral strategy like the long butterfly but bullish on volatility. It is a limited profit, limited risk options trading strategy. There are 3 striking prices involved in a short butterfly spread and it can be constructed using calls or puts.

Using calls, the short butterfly can be constructed by writing one lower striking in-the-money call, buying two at-the-money calls and writing another higher striking out-of-the-money call, giving the trader a net credit to enter the position. Maximum profit for the short butterfly is obtained when the underlying stock price rally pass the higher strike price or drops below the lower strike price at expiration.

If the stock ends up at the lower striking price, all the options expire worthless and the short butterfly trader keeps the initial credit taken when entering the position. However, if the stock price at expiry is equal to the higher strike price, the higher striking call expires worthless while the "profits" of the two long calls owned is canceled out by the "loss" incurred from shorting the lower striking call.

Hence, the maximum profit is still only the initial credit taken. Maximum loss for the short butterfly is incurred when the stock price of the underlying stock remains unchange at expiration.

At this price, only the lower striking call which was shorted expires in-the-money. The trader will have to buy back the call at its intrinsic value. There are 2 break-even points for the short butterfly position. The breakeven points can be calculated using the following formulae. At this price, all except the lower striking call expires worthless. While we have covered the use of this strategy with reference to stock options, the short butterfly is equally applicable using ETF options, index options as well as options on futures.

Commission charges can make a significant impact to overall profit or loss when implementing option spreads strategies. Their effect is even more pronounced for the short butterfly as there are 4 legs involved in this trade compared to simpler strategies like the vertical spreads which have only 2 legs.

If you make multi-legged options trades frequently, you should check out the brokerage firm OptionsHouse. The following strategies are similar to the short butterfly in that they are also high volatility strategies that have limited profit potential and limited risk.

The converse strategy to the short butterfly is the long butterfly. Long butterfly spreads are used when one perceives the volatility of the price of the underlying stock to be low.

The short butterfly can also be created using puts instead of calls and is known as a short put butterfly. The short butterfly spread belongs to a family of spreads called wingspreads whose members are named after a myriad of flying creatures. Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time Cash dividends issued by stocks have big impact on their option prices.

This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk.

A most common way to do that is to buy stocks on margin Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions.

They are known as "the greeks" Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account.

You should not risk more than you afford to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service. Toggle navigation The Options Guide.

View More Similar Strategies. Limited Unlimited Loss Potential: The financial products offered by the company carry a high level of risk and can result in the loss of all your funds.

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