Strategy: Sell n ITM Calls, ≤ 14 DTE
Buy 2n ATM Calls, Same Expiry
Sell n OTM Calls, Same Expiry
(Different Width Between Strikes)
Price Chart: Downtrending
Current IV%: ≈ 50%
IV Rank: ≈ 50
Trade: Sell x ITM call options; buy x + y ATM call options; sell y OTM call options, different strike widths.
Typical Strike Deltas:
Lower Short Calls ≈ −0.58 to −0.52
Central Long Calls ≈ 0.51 to −0.48
Higher Short 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, place the strikes of the butterfly 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 $75 as shown by the risk profile’s plotline. OTM broken wing unbalanced butterflies are among some of the most popular butterflies traded because they are profitable when they expire OTM.
Profit: Close when this trade returns a profit of 15 to 20 percent.
Loss: This trade experiences a limited loss that rarely exceeds 20 percent. DO NOT PERMIT OPTIONS TO EXPIRE ITM!