A bull call spread and a bear call spread are combined to form a call butterfly spread. This results in an inexpensive, neutral method with a favorable risk/reward ratio.
Long Butterfly spreads with calls
A long call butterfly is a complex options strategy that involves simultaneously buying call options at three different strike prices, with the middle strike being higher than the lowest and highest strikes. The options have the same expiration date and are typically used in a neutral market outlook. The strategy is designed to profit from a narrow trading range in the underlying security.
The trader profits from the strategy if the price of the underlying security remains within a certain price range at expiration. If the price of the security is outside of this range, the trader will experience a loss.
Leg 1 plus the net debit paid
Leg 3 minus the net debit paid
Stock price to be exactly at Leg 2
Limited to Leg 2 minus Leg 1 minus the net debit paid
Limited to the net debit paid
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