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Long Call Butterfly
A Long Call Butterfly is a combination of buying a Call, selling 2 higher strike price Calls, and buying an even higher strike price Call, with the same width across all strikes.
Payoff Diagram:
Direction Assumption: Neutral if done with ATM short strikes, or Bullish if done with OTM short strikes.
Maximum Profit: Limited to the difference between the Long Call strike and Short Call strike, minus debit paid.
Maximum Loss: Limited to net debit paid.
Breakeven Price:
• On the lower end, lower Long Call strike plus the net debit paid.
• On the higher end, higher Long Call strike minus the net debit paid.
Theta: Passage of Time -> Positive Effect
The net effect of time decay is positive. Should the underlying stays between the short strikes at expiration, all legs will decay to zero and expire worthless.
Volatility:
If Volatility decreases -> Positive Effect.
If Volatility increases -> Negative Effect.
Long Call Butterflies are Vega negative, meaning that if volatility increases, the position loses value.
