Long Call Butterfly

Butterfly's are three legged option combinations.

Components

Short two ATM call options, long one ITM call option and long one OTM call option.

Risk / Reward

Maximum Loss: Limited to the ATM strike less the ITM strike less the net premium paid for the spread.

Maximum Gain: Limited to the net premium received from the spread.

Characteristics

When to use: When you are neutral on market direction and bearish on volatility.

A long butterfly is similar to a short straddle except your losses are limited. This means that you make money when the market remains flat over the life of the options.

You might be thinking that it looks like a "short" strategy because of the similarity to the short straddle. You are right in thinking that they have similar characteristics, however, the difference between a Long Butterfly and a Short Straddle is the premium - a Long Butterfly will cost you money (or premium) to establish whereas a Short Straddle won't cost you anything as you receive money (premium) up front for putting on the position.