A long call butterfly trade is entered when a trader anticipates minimal movement in a stock’s price between initiation and expiration. This strategy involves buying an in-the-money call, selling two at-the-money calls, and buying an out-of-the-money call, resulting in a net debit and maximum loss equal to the initial cost. The potential profit is determined by the difference between the short and long calls minus the premium paid. Barchart’s Long Call Butterfly Screener for February 11th highlights such trades on popular stocks like TSLA, AMD, NVDA, GOOG, WMT, and PLTR.
An example of a Long Call Butterfly on Tesla involves buying the $350 strike call, selling two $425 strike calls, and buying one $500 strike call with a total cost of $5,400 and a maximum potential gain of $2,100. The trade has a Risk/Reward Ratio of 2.57 to 1 and a Profit Probability of 55.6%, with breakeven prices at $404 and $446. This short-term trade carries high risk, as indicated by the Barchart Technical Opinion rating of 8% Buy.
Another example on AMD for the same expiry date shows a similar strategy with a $3,390 cost, $1,360 maximum potential gain, and breakeven prices at $198.90 and $226.10. The Risk/Reward Ratio is 2.49 to 1, and the Profit Probability is 53.7%, with a Barchart Technical Opinion rating of 40% Buy. This trade also carries high risk due to its short-term nature.
The final example examines a Long Call Butterfly on Nvidia using the March 6 expiry, with a $2,314 cost, $1,686 maximum potential gain, and breakeven prices at $173.14 and $206.86. The Risk/Reward Ratio is 1.37 to 1, and the Profit Probability is 55.3%, with a Barchart Technical Opinion rating of 56% Buy. Long-term indicators support a continuation of the trend.
Long Call Butterfly Spreads offer built-in risk management, allowing traders to consider exiting if breakeven prices are breached. Proper position sizing is crucial to limit losses to 1-2% of the total portfolio value. Early assignment risk should be monitored, especially if short calls are in-the-money close to expiry. Options trading involves risks, and investors should conduct thorough research and consult financial advisors before making investment decisions.
Read more at Barchart: Long Call Butterfly Trade Ideas for February 11th