Long Butterfly
Low cost, high profits if the price is about a strike price
Last updated
Low cost, high profits if the price is about a strike price
Last updated
The Long Butterfly is a strategy that helps you to make a bet on low volatility: that the price of an asset won’t rise or fall significantly in either direction during the period of holding.
Instead of being bullish or bearish about the future price, you can have the following reasoning when buying it: “I don’t care what the price will be, but if it doesn’t change significantly from current levels in either direction during the period of holding the Long Butterfly, I win.”
The Long Butterfly is an optimal strategy when the price doesn’t rise or fall during the period of holding. The profit zone for this strategy is the opposite of a Straddle: you make profits when the price doesn’t change, and you lose when there is volatility with regards to the market price at the moment of buying the Long Butterfly.
With the Long Butterfly, you have higher premiums received for ATM options you sell in comparison to the total amount of premiums for OTM options you sell when you buy the Long Condor.
Buying one Long Butterfly is equal to selling ATM Call and ATM Put and at the same time buy OTM Call and OTM Put (10%, 20% or 30% OTM are available).
Long Butterfly is an inversion strategy. This means that the strategy includes selling (writing) of options, so they can't be exercised before expiry.
