Strategy: Sell n ITM Calls, ≤ 14 DTE
Buy 2n ATM or Slightly ITM Calls, Higher Strike, Same Expiry
Sell n OTM Calls, Same Expiry
(Same Width Between Strikes)
Price Chart: Strong directional price breakouts
Current IV%: ≈ 50%
IV Rank: ≈ 50
Trade: Sell n ITM call options; buy 2n ATM call options; sell n OTM call options.
Typical Strike Deltas:
Lower Short Calls ≈ −0.50 to −0.55
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: This trade requires a strong directional price breakout, and even then, this strategy cannot succeed without careful trade management.
Manage: This trade requires careful management and would rarely be left in its original form, which is a losing trade. Instead, it would more likely be legged into a vertical call on the basis of the underlying’s directional price move. If the central long calls of the body move ITM, one or both of the short call wings are closed.
Profit: Close losing short positions; sell the long calls when this trade returns a profit of 15 to 20 percent.
Loss: A debit is required when entering this trade. It will suffer a loss unless it is converted to either a vertical call spread or an ITM long call. Many traders avoid short call and short put butterflies. DO NOT PERMIT OPTIONS TO EXPIRE ITM!