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, ...