Long Call Butterfly

What is a Long Call Butterfly?

A long call butterfly is a three-strike neutral strategy using all call options. You buy one call at a lower strike, sell two calls at a middle strike, and buy one call at a higher strike. All options share the same expiration. The strikes are evenly spaced. You pay a small net debit to enter the trade.

The trade profits most when the stock lands exactly at the middle strike at expiration. Think of it as a precise bet on where the stock will be. The profit zone is narrow but the risk is very low — you can only lose the small debit you paid.

How to Set It Up

• Buy 1 call at the lower strike
• Sell 2 calls at the middle strike
• Buy 1 call at the upper strike
• Same expiration for all legs
• Equal spacing between strikes (e.g., $95/$100/$105 or $90/$100/$110)
• Strike selection: Center the middle strike where you think the stock will be at expiration. Wider wings cost more but give a wider profit zone.
• Expiration: Shorter expirations produce maximum profit faster but require more precision.

The net debit is typically small because the two sold calls offset most of the cost.

When to Use This Strategy

Use a long call butterfly when:

• You have a specific target price for the stock at expiration
• You expect low volatility and a range-bound market
• You want to make a directional bet with very limited risk
• You want a cheap trade with a high potential reward-to-risk ratio
• IV is elevated, making the sold options more valuable

Butterflies are ideal when you have conviction about where the stock will land but want to risk very little capital to express that view.

Example Trade

Stock XYZ is trading at $100 and you think it will stay near $100 through expiration.

• Buy 1 XYZ $95 call for $6.50
• Sell 2 XYZ $100 calls for $3.50 each ($7.00 total)
• Buy 1 XYZ $105 call for $1.50
• Net debit: $6.50 - $7.00 + $1.50 = $1.00 ($100 total)
• Max profit: ($5 - $1) x 100 = $400 (if XYZ is exactly at $100 at expiration)
• Max loss: $100 (the debit paid)
• Breakeven: $95 + $1 = $96 on the low side / $105 - $1 = $104 on the high side

If XYZ closes at $100, all your positions work perfectly. The $95 call is worth $5, the two $100 calls expire worthless, and the $105 call expires worthless. Profit: $500 - $100 cost = $400.

If XYZ closes below $95 or above $105, all options are either worthless or cancel each other out, and you lose the $100 debit.

Risk and Reward

• Max profit: (Wing width - net debit) x 100. $400 in our example. Achieved when the stock closes exactly at the middle strike.
• Max loss: Net debit paid. $100 in our example. Occurs when the stock moves beyond either wing.
• Breakeven: Lower strike + debit on the downside. Upper strike - debit on the upside. A $8 profit zone in our example ($96 to $104).

The reward-to-risk ratio can be excellent — 4:1 in our example. But the probability of hitting max profit is low because the stock needs to close right at the middle strike.

Tips and Common Mistakes

• Close at 50% of max profit. Do not try to squeeze out every dollar. If you paid $1 and it is worth $2.50, take it.
• Use wider wings for a wider profit zone. A $90/$100/$110 butterfly costs more but gives you more room.
• Watch for pin risk near expiration. If the stock is near your middle strike at expiration, you may face assignment on the short calls.
• Butterflies are cheap but not free. Commissions on four legs can eat into profits on a $100 trade.

Related Strategies

• Iron Butterfly — similar payoff using a short straddle with protective wings
• Long Put Butterfly — same structure using puts instead of calls
• Iron Condor — wider profit zone with lower max profit