Long Butterfly Call Spread Strategy

The long butterfly call spread is a combination of a bull spread and a bear spread, utilizing calls and three different exercise prices. A long butterfly call spread involves:

·         Buying a call with a low exercise price,

·         Writing two calls with a mid-range exercise price,

·         Buying a call with a high exercise price.

To put on the September 40-45-50 long butterfly, you: buy the 40 and 50 strike and sell two 45 strikes.
This spread is put on by purchasing one each of the outside strikes and selling two of the inside strike. To put on a short butterfly, you do just the opposite.
The investor's profit potential is limited.
Maximum profit is attained when the market price of the underlying interest equals the mid-range exercise price (if the exercise prices are symmetrical).

The investor's potential loss is: limited.
The maximum loss is limited to the net premium paid and is realized when the market price of the underlying asset is higher than the high exercise price or lower than the low exercise price.
The breakeven points occur when the market price at expiration equals ... the high exercise price minus the premium and the low exercise price plus the premium. The strategy is profitable when the market price is between the low exercise price plus the net premium and the high exercise price minus the net premium.