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,
(Same Width Between Strikes)
Price Chart: Uptrending
Current IV%: ≈ 50%
IV Rank: ≈ 50
Trade: Buy x ITM call options; buy x + y ATM call options; sell y OTM call options.
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 bullish, place the strikes of the butterfly to profit from a rally in the price of the underlying. Adjust the strike widths to control the entry debit or credit amount and profit potential. 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 drops.
Manage: As shown on the risk profile, careful trade management is important. Although the profit potential may be greater than with a balanced butterfly, the risk is also increased. To profit, this butterfly strategy must be closed if and when the price of the underlying is in the bottom one-third of the witch’s hat of the risk profile’s plotline. Remember, butterflies are typically closed when approximately 25 percent of the time remaining till expiration exists and before gamma risk becomes a factor.
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!