If there is a significant shift in either direction, the volatility strategy known as a short call butterfly can be beneficial. It stands in contrast to a long-call butterfly.
A short call butterfly is a complex options strategy that involves simultaneously selling 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 minus the net credit received
Leg 3 plus the net credit received
stock price to be less than Leg 1 or more than Leg 3
limited to the net credit received
limited and is equal to the difference between the prices at which the options were sold and bought.
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