Strategy: Buy x ITM Calls, ≤ 14 DTE
Sell x + y ATM or Slightly OTM Calls, Same Expiry
Buy y OTM Calls, Higher Strike, Same Expiry,
(Different Widths Between Strikes)
Price Chart: Up-trending
Current IV%: ≈ 50%
IV Rank: ≈ 50
Trade: Buy x ITM call options; buy x + y ATM call options; sell y OTM call options, different strike widths.
Typical Strike Deltas:
Lower Long Calls ≈ 0.20 to 0.30
Central Short Calls ≈ −0.18 to −0.25
Higher Long Calls ≈ 0.10 to 0.20
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 or neutral, place the strikes of the butterfly to profit from a rally in the price of the underlying. If the price of the underlying drops, keep the credit received when opened. Examine different strike and long option value setups on risk profiles. The one shown illustrates an entry credit, making this a popular strategy. Enter the trade when satisfied that the plot fits your market bias.
Manage: As shown on the risk profile, a rally requires careful trade management. This butterfly strategy can be closed for profit when the price of the underlying moves into the tent to return a profit between 15 to 20 percent. If the price fails to rally or drops and the strikes remain OTM, you can let the trade expire worthless to avoid commissions and exchange fees. Consider entering a Mark-triggered alert if the price of FDX breaches $165.
Profit: Close when this trade returns a profit of close to $500; as can be seen, a strong rally can return even more.
Loss: If unmanaged, a strong FDX price rally risks a loss in excess of $5,000. DO NOT PERMIT OPTIONS TO EXPIRE ITM!