A Long Call Butterfly is constructed with the following options:

  • Short 2 ATM (At-The-Money) Call Options
  • Long 1 ITM (In-The-Money) Call Option
  • Long 1 OTM (Out-Of-The-Money) Call Option

This strategy is employed when the investor anticipates minimal movement in the stock price or index. The goal is to profit from low volatility at a relatively low cost. The Long Call Butterfly provides a favorable risk/reward ratio while limiting potential losses. It's comparable to a Short Straddle, but with the advantage of capped losses.

The strategy involves selling 2 ATM Calls, buying 1 ITM Call, and buying 1 OTM Call options. The strike prices should be equidistant from each other. The positive outcome occurs when the stock or index remains within a specific range. The maximum reward is achieved when the stock or index is at the middle strike price at the time of expiration. However, the maximum losses are also limited.