Strategy: Buy n ITM Calls, ≤ 14 DTE
Sell 2n ATM Calls, Same Expiry
Buy n OTM Calls, Same Expiry
(Different Width Between Strikes)
Price Chart: Downtrending
Current IV%: ≈ 50%
IV Rank: ≈ 50
Trade: Buy x ITM call options; sell x + y ATM call options; buy y OTM call options, different strike widths.
Typical Strike Deltas:
Lower Long Calls ≈ 0.45 to 0.50
Central Short Calls ≈ −0.50 to −0.45
Higher Long Calls ≈ 0.48 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 bearish, the example trade places the strikes of the butterfly’s long option wing and short option body to profit from a drop in the price of the underlying. Adjust the strike widths to control the entry debit or credit amount. Examine different setups on risk profiles. Enter the trade when satisfied that the plot fits your market bias. Losses are limited even if the price of the underlying rallies.
Manage: As shown on the risk profile, careful trade management is important. To profit, this butterfly strategy must be closed if and when the price of the underlying drops below $145 as shown by the plot within the risk profile.
Profit: Close when this trade returns a profit that is greater than or equal to 15 to 20 percent.
Loss: This trade experiences a limited loss that rarely exceeds 20 percent. DO NOT PERMIT OPTIONS TO EXPIRE ITM!