Long Call Butterfly is a strategy that must be devised when the investor is neutral on the market direction and expects volatility to be less in the market.
A Long Call Butterfly strategy is formed by selling two At-the-Money Call Options, buying one Out-of-the-Money Call Option and one In-the-Money Call Option.
A Long Call Butterfly is similar to a Short Straddle except that here the investor’s losses are limited.
The investor will benefit if the underlying Stock/ Index remains at the middle strike at expiration.
Investor view: Neutral on direction and bearish on Stock/ Index volatility.
Risk: Limited to the premium paid.
Lower Breakeven: Strike price of Lower Strike Long Call + net premium paid.
Higher Breakeven: Strike Price of Higher Strike Long Call – net premium paid.