Long Call Butterfly
Description
The Long Call Butterfly is another rangebound strategy and is the opposite of a
Short Call Butterfly, which is a volatility strategy. Long butterflies are quite popular
because they offer a good risk/reward ratio, together with low cost. The long
options at the outside strikes ensure that the risk is capped on both sides, and this is
a much more conservative strategy than the Short Straddle.
The Long Call Butterfly involves a low strike long call, two ATM short calls, and an
OTM long call. The resulting is profitable in the event of rangebound action by the
stock. Although the risk/reward ratio is attractive, the problem is that the maximum
reward is restricted to the scenario where the stock is at the middle strike at expiration.
P/L Profile
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