Clarifying the Long Call Butterfly Breakeven

 One options strategy with a well defined risk and reward profile is the long call butterfly. Its goal of profiting from price stability or a modest price movement in a stock makes it a neutral strategy. Know where the breakeven points are on a long call butterfly before you start trading.

The Strategy's Mechanics


Three options contracts having the same expiration date make up a long call butterfly:


Purchasing One Call Option at a Lower Strike: You buy a call option that is somewhat in-the-money, or at a lower strike price.
Selling two call options at a middle strike price—typically at-the-money (ATM)—is known as selling two call options.
Purchasing a single call option with a higher strike price puts you marginally out-of-the-money (OTM).
Resolving Breakeven Points


Two breakeven points are a special feature of the long call butterfly:


Lower Breakeven Point: Determined by squaring the lower strike price with the net premium paid for the spread. Your lowest breakeven, for instance, is $51.00 if you paid a $1.00 net premium and the lower strike is $50.
The higher strike price less the net premium paid yields the upper breakeven point. With a $55 strike and a $1.00 net premium, your upper breakeven, using the same example, is $54.00.
If, on expiration, the stock price is precisely at the middle strike, this technique will yield its maximum profit.


Justification for Breakevens


You cannot manage your transaction without knowing the breakeven points:


Risk Assessment: The range of possible profit for your trade is defined by breakeven marks. Loss risk rises beyond these points.
Realistic expectations are established when one is aware of the stock price range required for profitability.
Adjusting the spread to mitigate risk or lock in partial profits is something you might think about doing if the stock price moves outside the breakevens.
Breakeven Illustration


Assume a stock is fetching $100. Paying a $2.00 net premium, you construct a long call butterfly with strikes at $95, $100, and $105.


Reduced Breakeven: $95 + $2.00 = $97.00
Upper Breakeven: $103.00 less $2.00
Main Things to Remember


Time to Expiration: Time value degradation helps you as expiration draws near by maybe lowering the breakeven marks.
High implied volatility might drive up option premiums, which would hurt breakevens.
In Brief


It helps to set expectations, assess possible risk, and modify your strategy as necessary to know the long call butterfly breakeven positions. Combining this information with a thorough grasp of the general mechanics of the approach allows you to make wise choices for possible options trading success.