Long Butterfly Option Strategy

What are the characteristics of this option strategy?

The Long Butterfly Option Strategy is an Advanced Options trading strategy that combines Long Call and Long Put options at three different strike prices for a net debit. The Long Butterfly options strategy is a limited risk, directional options strategy that is designed to take advantage of a neutral to slightly bullish market. The maximum potential profit for a Long Butterfly options strategy is realized when the underlying stock price moves to the middle strike price at expiration.

Is this a bullish, bearish or neutral strategy?

The Long Butterfly Option Strategy is a neutral to slightly bullish strategy.

Is this a beginner or an advanced option strategy?

The Long Butterfly Option Strategy is an advanced option strategy.

In what situation will I use this strategy?

The Long Butterfly Option Strategy is typically used when a trader expects a minor upward move in the underlying stock price.

Where does this strategy typically fall in the range of risk-reward and probability of profit?

The Long Butterfly Option Strategy typically has a lower risk-reward ratio and offers a higher probability of profit than other advanced options strategies.

How is this strategy affected by the greeks?

The Long Butterfly Option Strategy is generally most sensitive to changes in the underlying stock’s vega and gamma. Vega is the measure of the sensitivity of an option’s price to changes in implied volatility. Gamma is the rate of change of an option’s delta over a one point move in the underlying stock.

In what volatility regime (i.e VIX level) would this strategy be optimal?

The Long Butterfly Option Strategy is typically most optimal in an environment of low-to-medium volatility.

How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?

The Long Butterfly Option Strategy can be adjusted if the trade goes against the investor. This can be done by either rolling out (closing all open positions and re-establishing a Long Butterfly Option Strategy with a different strike price) or by closing either the long Call or Put to reduce losses. Adjusting the Long Butterfly Option Strategy is a relatively straightforward process.

Where does this strategy typically fall in the range of commissions and fees?

The Long Butterfly Option Strategy typically falls in the middle range of commissions and fees. The number of trades needed to enter and close out the strategy can increase commission costs.

Is this a good option income strategy?

The Long Butterfly Option Strategy can be used as an option income strategy. However, the probability of profit is typically lower than with other advanced options strategies.

How do I know when to exit this strategy?

The Long Butterfly Option Strategy should be exited when the underlying stock moves to the middle strike price at expiration or when the maximum potential profit has been made.

How will market makers respond to this trade being opened?

Market makers will typically respond to the Long Butterfly Option Strategy by temporarily widening the bid-ask spread. This is because market makers have to buy the long Call and Put options to hedge their position.

What is an example (with calculations) of this strategy?

Let’s assume that the underlying stock is trading at $75 and you want to enter a Long Butterfly Option Strategy. You purchase one $70 Call option at $3, one $80 Call option at $1, and one $85 Put option at $2. This will cost you a net debit of $6. At expiration, if the underlying stock is trading at $80 your maximum potential profit would be $4 (the cost of the options minus the net debit). If the underlying stock is trading at $70 your maximum loss would be the net debit of $6.

Conclusion

The Long Butterfly Option Strategy is a great way to take a neutral to slightly bullish outlook on a stock or index. MarketXLS can help traders evaluate this strategy quickly and easily with automated calculations and detailed options analytics. With MarketXLS, traders no longer have to manually input options data into their spreadsheets in order to analyze their trades. MarketXLS provides up-to-date options data and allows traders to quickly and easily evaluate their trades.

Here are some templates that you can use to create your own models

Long Butterfly with Calls Option Strategy
Long Butterfly with Puts Option Strategy
Iron Butterfly Option Strategy
Short Butterfly Spread
Butterfly for Shorts Spread

Search for all Templates here: https://marketxls.com/templates/

Relevant blogs that you can read to learn more about the topic

Options Trading (Strategies)
2 Leg Option Strategies
Maximizing Profits with a Bull Put Spread Strategy
Long Butterfly Spread With Puts (Using Excel Template)
5 Successful Options Strategies Using The Most Liquid Options