Long Call Butterfly Payoff and Risk Profile

Summary

The document explains a long call butterfly, a defined-risk options position intended for conditions where little movement is expected in the underlying. It combines a long lower-strike call, two short calls at the middle strike, and a long higher-strike call. All options share an expiration, and the strikes are equally spaced. An example walks through premiums and expiration payoffs for a stock near the middle strike.

The strategy’s maximum loss is the initial net debit, while its maximum reward is the distance between adjacent strikes less that debit. The article also describes calculating each leg’s expiration payoff across a range of underlying prices and summing them to plot the overall profile. Its example is illustrative and limited to expiration outcomes; it does not discuss early exercise, transaction costs, volatility changes, or the trade’s performance before expiration.

Key ideas

• A long call butterfly uses one lower-strike long call, two middle-strike short calls, and one higher-strike long call.
• All legs have the same expiration, and the strike intervals are equal.
• The position is designed for limited movement and has a maximum loss equal to its net debit.
• Its maximum reward is the strike spacing minus the initial debit.
• The payoff profile can be calculated by summing the expiration payoff of each option leg.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.