Long Call Butterfly
A neutral, low-cost strategy combining a bull call spread and a bear call spread — excellent risk/reward with limited capital at risk, ideal for range-bound markets.
A long call butterfly combines a bull call spread and a bear call spread sharing the same middle strike. All three legs use call options with the same expiration. It profits when the underlying closes near the middle strike at expiration.
Structure (3 strikes, 4 contracts):
- Buy 1 call at Strike A (lowest — lower wing)
- Sell 2 calls at Strike B (middle — the body)
- Buy 1 call at Strike C (highest — upper wing)
Strike A < Strike B < Strike C, all equally spaced. Strike B is typically ATM.
Decreasing Volatility (IV Crush)
When IV falls, short middle strikes lose value faster than long wing strikes — expands the profitable range and benefits the position.
Increasing Volatility
Rising IV increases all calls, but short middle strikes are hit harder — narrows the profitable range and works against the position.
Time Decay — When Profitable
When stock is near Strike B, time decay is your friend. Short middle strikes decay faster than long wings as expiration approaches.
Time Decay — When Losing
If stock has moved away from Strike B, time decay works against you by eroding the value of long wing calls.
- Low cost — small net debit
- Excellent risk/reward ratio
- Defined risk — max loss is net debit
- Benefits from IV crush
- Time decay helps when stock is near body strike
- Narrow sweet spot — max profit only at Strike B
- Three legs = more commissions
- Rising IV hurts — narrows profit window
- Time decay works against losers
- Assignment risk on short middle calls
Ideal Conditions:
- Range-bound market — expect stock to close near a specific price
- After a volatility spike — high IV makes debit cheaper; IV crush boosts the position
- Post-earnings when you expect the stock to settle
- Clear price target with strong conviction
Avoid When:
- Expecting a large directional move
- Implied volatility is very low
- Stock is trending strongly
- Bid-ask spreads are wide — execution costs will eat into the debit
- Buy 1 XYZ $90 Call @ $11.00
- Sell 2 XYZ $100 Calls @ $4.00 each
- Buy 1 XYZ $110 Call @ $0.50
Cost:
Net Debit: $3.50/share ($350 total)
P&L:
Max Profit: $6.50/share ($650) at $100
Max Loss: $3.50/share ($350)
Breakeven Points:
Lower: $90 + $3.50 = $93.50 | Upper: $110 − $3.50 = $106.50
- Take profit early — exit at 50–70% of maximum profit
- Know your max loss upfront — net debit is all you can lose
- Watch for early assignment on short calls (Strike B)
- Exit if stock breaks above Strike C or below Strike A
- Prefer liquid underlyings with tight bid-ask spreads