Short Call Butterfly

A Short Call Butterfly is a combination of selling a Call, buying 2 higher strike price Calls, and selling an even higher strike price Call, with the same width across all strikes.

Payoff Diagram:

Direction Assumption: Neutral if done with ATM long strikes, or Bullish if done with OTM long strikes.

Maximum Profit: Limited to net premium collected.

Maximum Loss: Limited to the higher Short Call strike minus Long Call strike minus net premium collected.

Breakeven Price: • On the lower end, lower Short Call strike plus the net credit collected. • On the higher end, higher Short Call strike minus the net credit collected.

Theta: Passage of Time -> Negative Effect The net effect of time decay is negative. Should the underlying stays between the short strikes at expiration, all legs will decay to zero and expire worthless.

Volatility: If Volatility decreases -> Negative Effect. If Volatility increases -> Positive Effect. Short Call Butterflies are Vega positive, meaning that if volatility increases, the position gains value.