Short Call Butterfly

What is a Short Call Butterfly?

A short call butterfly is the opposite of a long call butterfly. You sell the wings and buy the body. Specifically, you sell one lower-strike call, buy two middle-strike calls, and sell one higher-strike call. You collect a credit to enter the trade. The trade profits when the stock moves away from the middle strike — either up or down significantly.

Think of it as betting against the stock pinning to one price. A long butterfly wants the stock to sit still at the middle strike. A short butterfly wants the stock to move away from it. You make money from movement and lose money from stagnation.

How to Set It Up

• Sell 1 call at the lowest strike (A)
• Buy 2 calls at the middle strike (B)
• Sell 1 call at the highest strike (C)
• All same expiration
• Equal spacing between strikes. For example: 95/100/105
• Expiration: 30-60 days. You need the stock to move before expiration.
• Net credit: You collect a small credit since the wings you sell are worth more than the body you buy.

The credit is typically small because butterfly spreads are cheap. Your max profit is that credit, and it happens when the stock moves far enough in either direction.

When to Use This Strategy

Use a short call butterfly when:

• You expect a big move but are not sure of the direction
• You believe the stock will not stay near the current price
• You want a cheap volatility bet with defined risk
• There is an upcoming catalyst like earnings, FDA decision, or macro event
• You want an alternative to buying a straddle or strangle

This is a niche strategy. The max profit is small (just the credit), so it is not a big money maker. It is more commonly used to offset other positions or as part of a more complex trade.

Example Trade

Stock XYZ is trading at $100. You expect a big move before expiration.

• Sell 1 XYZ $95 call for $7.00
• Buy 2 XYZ $100 calls for $4.00 each ($8.00 total)
• Sell 1 XYZ $105 call for $2.00
• Net credit: $7.00 + $2.00 - $8.00 = $1.00 ($100 collected)

If XYZ drops to $90: All calls expire worthless. You keep the $100 credit. Max profit achieved.

If XYZ rallies to $112: The $95 call is worth $17, the two $100 calls are worth $12 each ($24 total), the $105 call is worth $7. Net: -$17 + $24 - $7 = $0. You keep the $100 credit.

If XYZ stays at $100: The $95 call is worth $5, the two $100 calls are worthless, the $105 call is worthless. Net value: -$5. Loss: $5 - $1 credit = $400 loss.

Risk and Reward

• Max profit: Net credit received. $100 in our example. Achieved when the stock finishes at or below the lowest strike, or at or above the highest strike.
• Max loss: (Wing width - net credit) x 100. ($5 - $1) x 100 = $400. Occurs when the stock finishes exactly at the middle strike.
• Breakeven: Lower strike + credit ($95 + $1 = $96) and upper strike - credit ($105 - $1 = $104). You lose money only when the stock is between $96 and $104.

The risk-to-reward is not great — you risk $400 to make $100. But the probability of max loss (stock pinning to exactly $100) is low.

Tips and Common Mistakes

• The credit is small. Do not expect to make big money on this trade. It is more of a positioning tool.
• Close early if the stock moves. If the stock moves away from the middle strike quickly, close for a small loss or breakeven rather than waiting for the full credit.
• Be aware of pin risk. If you hold to expiration and the stock is near the middle strike, you may end up with unexpected positions from the long calls being exercised while the short calls expire.
• Commission costs matter. Four legs mean four commissions (times two for open and close). Make sure the credit justifies the transaction costs.
• Consider a short put butterfly too. Same concept using puts. Sometimes one offers better pricing than the other.

Related Strategies

• Long Call Butterfly — the opposite: profits when the stock stays near the middle strike
• Short Put Butterfly — same concept using puts
• Straddle — another volatility play, but with unlimited profit potential