← Strategy LabLesson 33 · 4:41
Long call butterfly
Summary
The long call butterfly uses calls alone, buying one below the price, selling two at the price and buying one above, to bet XYZ ends close to where it is. In the example you pay $113, can make $387 if XYZ ends at exactly $100, and can never lose more than the $113. You break even at $96.13 and $103.87.
Key terms
- long call butterfly
- Buying one call below the price, selling two at the price and buying one above it, to pay a small amount for a bet the stock ends near the middle strike.
- net debit
- When a pair of trades sends cash out overall.
- tent shape
- body
- The options sold in the middle of a condor or butterfly.
- wings
- The bought options on the outside of a condor or butterfly that put a floor under the loss.
- trading costs
- The costs of buying and selling each option, which add up when a trade has four options.
Check yourself
Answer each question to see why the right answer is right.
1. How much does the lesson's long call butterfly cost, net?
2. XYZ ends at $110 on the last day. What is your result?
3. Where does the trade break even on the last day?
4. Why does the line fall past $100 even though you own the $95 call?
5. XYZ ends right at $100. What is your result?
Finished the video and the quiz? .