Short Call Butterfly
Entering a short call butterfly entails selling (1) lower strike call, buying (2) middle strike calls and selling (1) higher strike call (same expiration month, strikes are equal distance). It's essentially a combination of a lower strike bear call spread and a higher strike bull call spread, and it's similar to a short call condor except the long calls use the same strike.
(draw a short call butterfly risk diagram here)
You're not bullish or bearish, but you do think a big move is coming and along with it, an expansion in volatility. You employ a lower strike bear call spread, which achieves max profitability when the underlying drops (although profitability is capped) and a higher strike bull call spread, which achieves max profitability when the underlying rallies (although profitability is capped). If you are correct, if the stock moves big (preferably above the upper strike or below the lower strike) you'll profit.
XYZ is at $55.00, and your analysis says a big move is coming (earnings or some other big announcement). You sell (1) 50 call at $6.00, buy (2) 55 calls at $2.50 and sell (1) 60 call at $1.00. The net credit is $2.00.
Below the lowest strike, all calls expire worthless, and your profit is the net credit received when the trade was initiated.
Above the highest strike, all calls are in-the-money and exactly cancel each other out. Your profit is the net credit received when the trade was initiated. For example, if the stock is at $65, the 50 call will be worth $15.00 ($9.00 loss), the 55 calls will be worth $10 ($7.50 profit each) and the 60 call will be worth $5 ($4.00 loss). The net of this is a $2.00 profit.
At $55, your max loss occurs because the loss from the long calls at the middle strike will be greater than the gains from the short calls at the outer strikes. At $55, the 50 call will be worth $5.00 ($1.00 profit), the 55 calls will be worthless ($2.50 loss each) and the 60 call will be worthless ($1.00 profit). The net of this is a $3.00 loss.
The PL chart below graphically shows where this trade will be profitable and at a loss.