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Short Call Butterfly Option Strategy

Short Call Butterfly Option Strategy

What is Short Call Butterfly Option Strategy?

  • Short Call Butterfly Option Strategy is a non-directional strategy that offers low reward/risk along with low cost. In short Call Butterfly traders expect the market to show significant move either upside or downside and volatile to be on the higher side. This strategy offers less returns as compared to strategies like Straddle and Strangle for relatively higher risk. It is opposite to Long Call Butterfly. In scenarios where strike difference is not equal it is known as Modified Short Call Butterfly.

When to Execute?

  • Short Call Butterfly can be executed when. Expecting a significant move either side, where your maximum profit occurs if the stock moved significantly up or down, profit is limited on both sides. Ideal when one is anticipating very high volatility in the stock price.

What is the Trade?

  • Short Call Butterfly can be devised by selling One lot In-the-Money (ATM) Call, buying 2 lots At-the-Money (ATM) Calls and selling 1 lot Out-of-Money (ATM)Call of the same underlying and expiration, while the difference between the strike price should be equal. Short Call Butterfly should not be devised based on moderately bullish and bearish biasness by shifting the spread completely to the OTM or IMT side respectively.

Break-Even Point for Short Call Butterfly

  • There will be two breakeven in this Long Call Butterfly. Upper Breakeven = ITM Short CE – Net Premium Paid. Lower Breakeven = OTM Short CE + Net Premium Paid

What will be maximum profit?

  • Maximum Profit in this strategy occurs if markets close above and below Sold OTM CE or Sold ITM CE strike prices respectively.

What will be maximum loss?

  • Maximum Loss occurs if the stock fails to give any momentum and expires near the ATM strike calls. Maximum loss is the difference between first and second call less net credit received.

What are the advantages?

  • Idle for the stock that is range bound for the long time and is expected to give breakout/ breakdown. It is a net credit strategy with defined reward to risk.

What are the disadvantages?

  • Idle for the stock that is range bound for the long time and is expected to give breakout/ breakdown. It is a net credit strategy with defined reward to risk. Strike selection is a key to garner maximum benefit.

Example for Short Call Butterfly:

  • Nifty future price is 15500. A Short Call Butterfly can be devised by Buying two lot of 15500 CE (ATM) @ 165 and selling one lot of 15300 CE(ITM) at Rs. 200 and 15700 CE at 100 respectively. Net Premium Paid or Received = Rs. (+30). Maximum profit will if market closes exactly at 15500, Max Loss if underlying above or below the upper or lower sold strike price i.e., 15300 and 15700