Modified Call Butterfly
Description
The Modified Call Butterfly is identical to the Long Call Butterfly with the exception
that the distance between the middle and higher strike calls is closer than that of the
lower and middle strikes.
The net effect of this is that the position changes to a rangebound strategy with a
bullish bias. As such, we make our biggest profits if the stock remains around the
middle strike, but we can still make a profit if the stock breaks to the upside.
This is a fiddly strategy and should only be used if you have an analyzer handy;
otherwise, it would be easy to miscalculate your risk profile. But in terms of its use-
fulness, the Modified Butterfly is extremely useful for butterfly enthusiasts who
need some flexibility.
The Modified Call Butterfly involves a low strike long call, two ATM short calls,
and an OTM long call. The resulting position is profitable in the event of rangebound
or rising action by the stock. Although the risk/reward ratio is attractive, the prob-
lem remains 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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