A Long Call Butterfly involves buying one call option at a lower strike, selling two call options at a middle strike, and buying one call option at a higher strike. It profits when the price stays near the middle strike at expiry.
- Ideal for low-volatility conditions, where price is expected to remain range-bound.
- Strike prices are chosen equidistant (e.g., lower, middle, and higher strike prices at equal intervals).
- Risk is limited to the net premium paid, and profit is capped at the difference between the adjacent strikes minus the premium paid.
- Provides high reward for minimal price movement within the range.
Example:
- NIFTY trading at 18,000.
- Buy 17,900 Call at ₹200, sell 2 × 18,000 Calls at ₹150 each, and buy 18,100 Call at ₹100 (lot size = 50).
- Outcome:
- If NIFTY stays at 18,000 at expiry:
- Both bought calls expire OTM.
- Middle strike calls expire worthless.
- Net profit = ₹10,000 (maximum profit).
- If NIFTY rises to 18,100 at expiry:
- Loss from the middle strike calls = ₹5,000.
- Gain from the higher and lower strikes = ₹5,000.
- Net profit = ₹0.
- If NIFTY falls below 17,900 at expiry:
- All options expire worthless.
- Net loss = ₹5,000 (premium paid).
- If NIFTY stays at 18,000 at expiry: