Long Butterfly Option Strategy

What are the characteristics of this option strategy?

The Long Butterfly Option Strategy is a mildly bullish, limited risk strategy that aims to benefit from a small move in either direction in the underlying stock. It involves buying one low strike priced call option, selling two at-the-money strike priced call options, and buying one high strike priced call option. This strategy is otherwise known as a Butterfly Spread.

Is this a bullish, bearish or neutral strategy?

This strategy is considered mildy bullish. It expects the underlying stock to make limited move in either direction and for the price of the underlying stock to stay between the two strike prices when options expire.

Is this a beginner or an advanced option strategy?

This strategy is considered to be an advanced option strategy as it requires a good understanding of the market, the underlying stock, and the risks associated with using this strategy. It also requires the ability to plan and manage the positions before and after they are entered.

In what situation will I use this strategy?

This strategy is typically used when the trader expects the underlying stock to remain relatively flat. It offers limited risk and allows the trader to take advantage of time decay to profit from the positions opened.

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

This strategy typically falls in the medium range of risk-reward and probability of profit. It has a relatively limited risk that offers moderate to low reward but also has a high probability of success if the underlying stock remains within the boundaries of the two strike prices.

How is this strategy affected by the greeks?

The Long Butterfly Option Strategy is primarily affected by time decay. This means that if the underlying stock remains the same, the value of the options will decrease due to the loss of time value. This strategy is also affected by the volatility of the underlying stock, as options with higher volatility will receive more time value than those with lower volatility.

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

This strategy is best used in a low to moderate volatility regime. It should be used when the VIX level is below 30, as high volatility will reduce the probability of success for this strategy.

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

Adjusting this strategy when the trade goes against you can be difficult. It requires an understanding of the markets, the underlying stock, and the risks associated with the adjustment. It is possible to implement a variety of adjustments, such as rolling up the short call side or rolling out the long call side. However, the difficulty of the adjustment will depend on the individual trader’s understanding of the markets and risks.

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

This strategy typically falls in the low to moderate range when it comes to commissions and fees. The strategy requires four trades, and each individual trade would incur a commission or fee.

Is this a good option income strategy?

This strategy is not usually used for option income as the strategy relies on the underlying stock staying within two predetermined strike prices in order for it to be successful. In addition, the reward for this strategy typically does not justify the risk.

How do I know when to exit this strategy?

The best way to determine when to exit this strategy is to use risk management techniques. This means setting a stop loss to close out of the trade if the underlying stock moves too far in either direction. It is also advisable to use price targets, with realistic profit levels set beforehand and exited when achieved.

How will market makers respond to this trade being opened?

Market makers are likely to respond positively to the Long Butterfly Option Strategy as it is low risk and offers limited potential reward. This means that they will be likely to offer profitable fill prices and favourable spreads.

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

For example, let’s assume that a trader is expecting Microsoft (MSFT) to remain in the range of $130-$150 for the duration of the two month options contract. The trader will then purchase a $125 strike priced call option for 5.50, sell two $135 strike priced call options for a total of 11, and buy a $145 strike priced call option for 4. The maximum loss for this trade is $1, the maximum reward is $4, and the break-even points are $136 and $144.

MarketXLS and How it can help

For traders who are looking to execute the Long Butterfly Option Strategy in the market, MarketXLS can provide information on the volatility of the underlying stock, the price of options, vega of options, and the commissions and fees associated with the strategy. This intuitive platform allows traders to quickly and easily analyze their strategies and obtain detailed insights into the potential outcomes of their trades. Furthermore, the platform allows traders to quickly and easily enter trades into the market without having to go through a broker. By using MarketXLS, traders have access to a powerful and intuitive tool that can help them achiieve better trading results.

For more information about the Long Butterfly Option Strategy You can use this link: https://marketxls.com/short-iron-butterfly-explained-excel-template/.

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