How To Sell A Call Butterfly From the Chart
Selling a Call Butterfly is a multi-legged, high volatility, short options play profitable when a stock moves significantly in either direction. These options extend from the purchase date to the selected expiration date. This strategy involves buying two calls and simultaneously selling one call at a lower and one at a higher strike price. Below are the steps to place an order from the chart to sell a call butterfly.
1. Click the Opt (options) button at the bottom of the price pane to open the Option Strategies menu
2. Select Short Call Butterfly from the Menu
This places the On-Chart Order Ticket at the left of the chart with the fields pre-filled based on the user-defined default option sell ticket.
The order ticket contains:
- Contract details for both options (action, date, option type, strike price, premium)
- Expiration dates (dropdown and grid)
- Order type
- Order price (net premium)
- Spread (natural-far)
- Quantity
- Duration
- Cost of trade
If no changes are desired, simply click Sell to Open Call Butterfly and confirm to place the order.
3. Select Expiration Date
Change the expiration date either to closer or further dates using the arrows
Alternately, select a specific expiration date from the drop down menu
4. View available strike prices with the limit price lines
Click and drag the Limit lines between the available strike prices for the selected expiration date. These are represented by the hash marks at the left of the P&L Zones. Simply stop at the desired strike for the contract.
5. Select the order type desired for the contracts
Either leave the order set on Limit, or select a different order type from the drop down menu.
Using a Market order will allow the order to get filled but will remove any entry price control.
6. Set a Limit Price (optional)
The Limit slider shows the spread between the natural (in this case, the bid) and the far (in this case, the ask). To set a price (net premium) within the spread at which to place your order, click at any point on the slider. The limit value is seen in the price field next to the "Lmt" order type.
7. Use a Step to Limit order (optional)
Another way to take advantage of the spread is the Step to Limit order. Choose the Step to Limit order from the drop down menu. (A Step to Market order acts the same as a Step to Limit order except that if no preferable fill is achieved during the step period, the order then moves to the Market price.)
Set the beginning of the slider at the limit price desired for the initial order. This will be the limit price at which the order will be entered.
Over the predetermined time period the limit price (net premium) will be automatically modified up from the initial entry price toward the Natural (or selected) price. The step to limit order will attempt to secure a preferable fill price in this process. Modification stops if no preferable fill is received and the limit price reaches the Natural.
8. Set the quantity
Select the number of contracts for the order. (Note: remember a single option contract normally controls 100 shares of stock.)
9. Submit the order
Click Sell to Open Call Butterfly
Click Place Order to confirm and submit
10. Viewing the Position
As is illustrated by the on-chart P&L Zones, the position experiences maximum loss if at expiration it closes at the long calls (inner) strike price (2). Maximum loss is the middle strike price minus both the lower strike price and net premium (credit). From the long strike price to the break-even points (4 & 5) there is declining loss. From the break-even points to the short (outer) strike prices (1 & 3), there is increasing gain. Maximum gain is the net premium (credit) received for the positions. It occurs above the upper strike price or below the lower strike price.
The trading tools work on either a LIVE brokerage account or a PAPER (simulated) trading account. Live market trading requires an account with TC2000 Brokerage (www.TC2000Brokerage.com).