Long Call Butterfly – Range-Bound Precision Strategy

What is a Long Call Butterfly?

A Long Call Butterfly is a range-bound options strategy that traders use when they expect the stock or index to close near a specific strike price at expiry. It involves combining three different strikes to form a “tent-shaped” payoff structure, where maximum profit is achieved if the underlying expires exactly at the middle strike.

The Long Call Butterfly is popular because it is a very low-cost strategy with a clearly defined risk and reward. It’s ideal for traders who want to take advantage of expiry week positioning when the market often gravitates toward round numbers or key levels.

• Risk is limited: The maximum loss is the small net premium paid.
• Profit potential is high: Max profit occurs if the underlying closes exactly at the middle strike.
• Low cost: Very cheap compared to outright directional bets.

When to Use a Long Call Butterfly

This strategy works best during expiry week or when you expect the market to remain calm and settle near a specific level. It’s not meant for trending or volatile conditions, but for precision expiry plays.

• You expect the market to pin near a specific strike at expiry.
• You want to risk very little but aim for a high reward.
• Volatility is expected to stay low.
• You are comfortable with the possibility of total premium loss if the trade fails.

Setup Checklist

• Underlying: Use liquid indexes like NIFTY or BankNIFTY.
• Strikes: Select three consecutive strikes (lower, middle, higher).
• Middle Strike: Should be close to where you expect expiry to settle.
• Expiry: Best deployed in the final week of expiry for maximum efficiency.

Entry Rules

1. Buy 1 lower strike Call option.
2. Sell 2 middle strike Call options.
3. Buy 1 higher strike Call option (same expiry).
4. Record net premium paid — this is your maximum loss.

Risk & Management

The Long Call Butterfly has simple but strict risk/reward rules:

• Max Loss: Limited to net premium paid.
• Max Profit: Achieved if underlying closes exactly at middle strike.
• Time decay (Theta): Works in your favor if price moves toward the middle strike near expiry.
• Volatility (Vega): Lower volatility improves chances of expiry pinning.
• Adjustment: Generally not adjusted — either it works or you lose the small premium.

Exit Rules

• If expiry nears and price is at middle strike: Hold for max profit or exit early to lock gains.
• If price drifts away from the range: Exit early if premium erodes to avoid total loss.
• If market becomes volatile: Accept defined loss and exit, as butterflies perform poorly in high volatility.

Position Sizing & Money Management

• Risk only small amounts — butterflies are designed for cheap, high-R:R setups.
• Never overallocate capital because of low cost.
• Treat butterflies as expiry week tactical plays, not long-term investments.

Example: NIFTY Long Call Butterfly

Assume NIFTY is at ₹25,000:

• Buy 24,800 CE @ ₹350
• Sell 2 × 25,000 CE @ ₹240 each
• Buy 25,200 CE @ ₹150

Net Premium Paid: ₹20 (₹500 total)

Max Profit: ₹4,500

Max Loss: ₹500

Breakeven Range: 24,820 – 25,180

Key Metrics to Track

• Breakeven points: Lower strike + premium, Higher strike – premium.
• Max profit: Middle strike at expiry.
• Max loss: Net premium paid.
• Theta: Time decay benefits the strategy if expiry aligns near middle strike.
• Delta: Small, turns positive/negative depending on price movement.

Advantages of a Long Call Butterfly

• Extremely low cost.
• Very high reward-to-risk ratio.
• Clear profit/loss boundaries.
• Ideal for expiry week precision trading.

Disadvantages of a Long Call Butterfly

• High chance of expiry outside profitable zone.
• No benefit if the market trends strongly.
• Profits require precise expiry settlement near middle strike.

Comparison: Long Call Butterfly vs Bull Call Spread

The Long Call Butterfly is a favorite among intermediate traders looking for low-cost, tactical plays during expiry week. Its limited risk and high reward potential make it an attractive strategy when the market is expected to settle near a specific strike.