Short Call Butterfly
The inverse of the Long Call Butterfly — sell the outer strikes and buy 2 at the money. Profits on a strong directional move either way.
Profit / Loss Diagram
Short Call Butterfly at expiration
What is this strategy?
The Short Call Butterfly is the inverse of the Long Call Butterfly: you sell the outer strikes and buy 2 calls at the centre strike. The result is maximum gain if price moves outside the range on either side, and maximum loss if it stays exactly at the centre.
It is a <em>long volatility</em> strategy with both risk and reward capped. Useful ahead of expected events with a high probability of a sharp move — earnings, macro decisions — when you prefer defined risk over a long straddle.
Compared with a straddle it offers smaller gains but also capped losses. Ideal when implied volatility is already elevated pre-event, making a straddle expensive, and the Short Call Butterfly still collects a decent credit.
Construction
| Action | Instrument | Strike | Expiration | Example |
|---|---|---|---|---|
| SELL | 1 Call | ITM (A) | 30-45 DTE | -1 SPY 440 Call |
| BUY | 2 Calls | ATM (B) | Same expiry | +2 SPY 450 Call |
| SELL | 1 Call | OTM (C) | Same expiry | -1 SPY 460 Call |
Example
SPY at $450 ahead of an FOMC decision. You expect a move greater than $10. Short call butterfly 440/450/460.
- Net Credit +$300
- Maximum Gain $300 (the credit) if SPY < $440 or > $460
- Maximum Loss $700 if SPY = $450 exactly
The Greeks
Same as the Long Call Butterfly but inverted.
Time works against you — this is a long-volatility position.
Benefits from rising implied volatility.
Long gamma — it profits from a fast move.
Position Management
- 01 Open Pre-Event, Close Post-Event Open 5–10 days before the catalyst and close within 30 minutes of the event to avoid IV crush.