Short Call Butterfly

Short Call Butterfly

Components

Long two ATM call options, short one ITM call option and short one OTM call option.

Risk / Reward

Maximum Loss: Limited to the net difference between the ATM strike less the ITM strike less the premium received for the position.

Maximum Gain: Limited to the net premium received for the option spread.

Characteristics

When to use: When you are neutral on market direction and bullish on volatility. Neutral on market direction meaning that you want the market to move in either direction - i.e. bullish and bearish at the same time.

Short Call Butterfly's have a similar pay off to the Long Straddle in that the downside risk is limited. A Short Butterfly's risk is limited to the premium paid for the three options.

Comments (4)

PeterFebruary 14th, 2012 at 4:49pm

Hi Azad,

Not with a short butterfly. If you are bearish and want some upside protection then I suggest you take a look at a Put Backspread.

AzadFebruary 14th, 2012 at 10:27am

Hi Peter,

Is their any unlimited potential of profit in this strategy. I am bearish on Indian market which is the best strategy I used with protection.

PeterJuly 28th, 2011 at 6:23pm

For American options on stocks yes, especially as the stock approaches its ex-dividend date. Long call option holders may exercise for stock so they can receive the dividend.

shaivalJuly 28th, 2011 at 4:20pm

Is there any risk of getting option assigned?

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