Strategy: Sell x ITM Calls, Expire ≤ 14 DTE
Buy x + y ATM Calls, Same Expiry
Sell y OTM Calls, Same Expiry
(Same Width Between Strikes)
Price Chart: Uptrending
Current IV%: ≈ 50%
IV Rank: ≈ 50
Trade: Sell x ITM call options; buy x + y ATM call options; sell y OTM call options.
Typical Strike Deltas:
Lower Short Calls ≈ −0.60 to −0.50
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 the price of the underlying security to rally to return a profit, as indicated by this strategy’s risk profile. This might encourage the trader to choose a slightly longer time till expiration to provide ample time for the price to rally for a profitable outcome.
Manage: As described in the previous paragraph, a price rally above $5 per share rewards the trade, which would likely be closed as soon as it returns an acceptable profit (see the above-mentioned risk profile). A rally increases the premium values of the long call positions. The short call wings would be closed, while the central long calls of the body would be monitored until closed for the increased premium. As noted earlier, short butterfly trades are inferior to the long call butterfly trades, which carry less risk and are easier to manage.
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 to enter this trade. It will suffer a loss unless it is legged into 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!