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    Short Call Butterfly

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    pkkothari
    This strategy involves being short one call at a lower strike, long two calls at a middle strike, and short one call at a higher strike, all with the same expiration date. The maximum loss occurs if the underlying stock is at the middle strike at expiration. The maximum profit occurs if the stock is outside the wings at expiration. This strategy profits if the stock moves outside the wings by expiration.

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    Short Call Butterfly

    Uploaded by

    pkkothari
    63 views2 pages
    This strategy involves being short one call at a lower strike, long two calls at a middle strike, and short one call at a higher strike, all with the same expiration date. The maximum loss occurs if the underlying stock is at the middle strike at expiration. The maximum profit occurs if the stock is outside the wings at expiration. This strategy profits if the stock moves outside the wings by expiration.

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    This strategy involves being short one call at a lower strike, long two calls at a middle strike, and short one call at a higher strike, all with the same expiration date. The maximum loss occurs if the underlying stock is at the middle strike at expiration. The maximum profit occurs if the stock is outside the wings at expiration. This strategy profits if the stock moves outside the wings by expiration.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    63 views2 pages

    Short Call Butterfly

    Uploaded by

    pkkothari
    This strategy involves being short one call at a lower strike, long two calls at a middle strike, and short one call at a higher strike, all with the same expiration date. The maximum loss occurs if the underlying stock is at the middle strike at expiration. The maximum profit occurs if the stock is outside the wings at expiration. This strategy profits if the stock moves outside the wings by expiration.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    EQUITY OPTIONS STRATEGY

    Short Call Butterfly


    DESCRIPTION MAX LOSS
    A short call butterfly consists of two long calls at a middle strike and short one The maximum loss would occur should the underlying stock be at the middle
    call each at a lower and upper strike. The upper and lower strikes (wings) must strike at expiration. In that case, the short call with the lower strike would be in-
    both be equidistant from the middle strike (body), and all the options must have the-money and all the other options would expire worthless. The loss would be
    the same expiration date. the difference between the lower and middle strike (the wing and the body), less
    the premium received for initiating the position.
    OUTLOOK
    The strategy is hoping to capture a movement to outside of the wings at the MAX GAIN
    expiration of the options. The maximum profit would occur should the underlying stock be outside the
    wings at expiration. If the stock were below the lower strike all the options would
    SUMMARY expire worthless; if above the upper strike all the options would be exercised and
    This strategy tends to be successful if the underlying stock is outside the wings offset each other for a zero profit. In either case the investor would pocket the
    of the butterfly at expiration. premium received for initiating the position.
    MOTIVATION PROFIT/LOSS
    The investor is attempting to correctly predict an upcoming move in either The potential profit and loss are both very limited. In essence, a butterfly at
    direction, usually for a limited debit, if any. expiration has a minimum value of zero and a maximum value equal to the
    VARIATIONS distance between either wing and the body. An investor who sells a butterfly
    receives a premium somewhere between the minimum and maximum value,
    Short Call Butterfly
    and profits if the butterfly’s value moves toward the minimum as expiration
    Net Position approaches.
    +
    BREAKEVEN
    The strategy breaks even if at expiration the underlying stock is above the lower
    strike or below the upper strike by the amount of premium received to initiate
    0 the position.
    50 55 60 65 70
    VOLATILITY
    An increase in implied volatility, all other things equal, will usually have a slightly
    - positive impact on this strategy.
    TIME DECAY
    The passage of time, all other things equal, will usually have a negative impact on
    EXEMPLE this strategy if the body of the butterfly is at-the-money, and a positive impact if
    Short 1 XYZ 65 call the body is away from the money.
    Long 2 XYZ 60 calls
    Short 1 XYZ 55 call ASSIGNMENT RISK
    The short calls that form the wings of the butterfly are subject to exercise
    MAXIMUN GAIN at any time, while the investor decides if and when to exercise the body. The
    Net premium received components of this position form an integral unit, and any early exercise could
    be extremely disruptive to the strategy. In general, since the cost of carry makes
    MAXIMUN LOSS it optimal to exercise a call option on the last day before expiration, this should
    High strike - middle strike - net premium received not pose a problem. But the investor should be wary of using this strategy where
    dividend situations or tax complications have the potential to intrude.
    The short call butterfly and short put butterfly, assuming the same strikes and And be aware, a situation where a stock is involved in a restructuring or
    expiration, will have the same payoff at expiration They may, however, vary in capitalization event, such as a merger, takeover, spin-off or special dividend,
    their likelihood of early exercise should the options go into-the-money or the could completely upset typical expectations regarding early exercise of options
    stock pay a dividend. on the stock.
    While they have similar risk/reward profiles, this strategy differs from the long
    iron butterfly in that a positive cash flow occurs up front, and any negative cash
    flow is uncertain and would occur somewhere in the future.
    EXPIRATION RISK RELATED POSITION
    This strategy has expiration risk. If at expiration the stock is trading right at either Comparable Position: Short Put Butterfly
    wing the investor faces uncertainty as to whether or not they will be assigned on Opposite Position: Long Call Butterfly
    that wing. If the stock is near the upper wing, the investor will be exercising their
    calls from the body and is fairly certain of being assigned on the lower wing, so
    the risk is that they are not assigned on the upper wing. If the stock is near the
    lower wing the investor risks being assigned at the lower wing.
    The real problem with the assignment uncertainty is the risk that the investor’s
    position when the market re-opens after expiration weekend is other than
    expected, thus subjecting the investor to events over the weekend.

    EQUITY OPTIONS STRATEGY


    Short Call Butterfly

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