Long Call Butterfly Spreads for Range-Bound Price Expectations

Summary

This article explains a long butterfly spread as a defined-risk options position for an underlying expected to remain near a target price at expiration. The call version combines one lower-strike long call, two short calls at a middle strike, and one higher-strike long call, with equal spacing between strikes. The spread is entered for a net debit. Its potential profit is greatest near the middle strike, while the initial debit limits the loss; the article also gives formulas for the two breakeven levels and describes the payoff shape.

A historical example uses options on an Indian stock, and a Python payoff illustration reports a maximum profit and loss for its particular inputs. Those figures depend on the selected premiums and strikes and are not evidence of repeatable performance. The article presents the spread as suitable for a narrow trading range and discusses volatility expectations, but its wording about direction and volatility is not fully consistent. Actual outcomes can also depend on commissions, execution prices, and expiration behavior. The explanation is therefore useful for understanding the structure and payoff, rather than as a validated trading recommendation.

Key ideas

• A long call butterfly combines one lower-strike long call, two middle-strike short calls, and one higher-strike long call with equal strike spacing.
• The spread is typically entered for a net debit and has limited maximum loss.
• The payoff is highest when the underlying expires near the middle strike, with breakeven levels on either side.
• The article illustrates the payoff with a historical stock option example and a Python calculation, but the results depend on that example’s inputs.
• The strategy is intended for a narrow price range, while commissions, execution, and volatility assumptions can affect realized outcomes.

Tags

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