2-Step Long Call Butterfly – The Option Strategy Desk Reference

2-Step Long Call Butterfly

Strategy: Combines Two Vertical Calls Entered at Different Times.

1st Trade: Buy n ATM Calls, 21 DTE

Sell n OTM Calls, Same Expiry

2nd Trade: Sell n OTM Calls, Same Strike As 1st Short Call,
14 DTE

Buy n OTM Calls, Same Expiry, Higher Strike to Create a Butterfly.


Price Chart: Uptrending preferred

Current IV%: 50%

IV Rank: 50

Trade: Buy n ATM call options, sell n OTM call options to create a bull call. Then “leg into” a bear call comprised of a short call and a farther OTM long call as a trade management strategy. An identical number of short calls is added at the same strike as that of the original short calls. The OTM long calls form the upper wing of the butterfly. This two-step butterfly is a common maintenance strategy used with bull calls. The second vertical spread is often added later in the day or several days apart. Also, sufficient time till expiration of the initial bull call must exist to permit the addition of the bear call.

Typical Strike Deltas:

Lower Short Calls 0.55 to 0.50

Central Long Calls 0.50 to 0.45

Higher Short Calls 0.45 to 0.40

NOTE: Long butterflies that include long wing options and short body options are more popular than short butterfly options. Short call and put butterflies are included for comparison purposes. (See the long call butterfly’s note and table for more information.)

Goals: When bullish, place the strikes of the butterfly to profit from a rally in the price of the underlying. The butterfly is a defined-risk strategy. As shown by the plotline within the above risk profile, this ­strategy can also return a small profit if the price of the underlying drops below $235.

Manage: Close the butterfly for profit if and when the price of the underlying rallies to approximately one-third up the risk profile’s tent-shaped plotline. Because the peak of the sample trade is reasonably narrow, close attention is required. Also notice how a price drop that exceeds $6.00 also rewards the addition of the options that comprise the bear call.

Profit: Close when this trade returns a profit of between 10 and 15 percent.

Loss: This trade’s maximum loss is limited to approximately $320. DO NOT PERMIT OPTIONS TO EXPIRE ITM!