A trader shorts or writes a Call Option when he feels that underlying stock price is likely to go down. Selling Call Option is a strategy preferred for experienced traders.
However this strategy is very risky in nature. If the stock rallies on the upside, your risk becomes potentially unquantifiable and unlimited. If the strategy
This strategy is opposite of the Long Call Butterfly Strategy, a trader expects the market to remain range bound in Long Call Butterfly, but here he expects the market to move beyond strike boundaries in Short Call Butterfly. If the trader is bullish on the market’s volatility, he will implement this strategy. Here also there should be equal distance between the ..
Lower Break-even = Lower Strike Price + Net Premium, Upper Break-even = Higher Strike Price - Net Premium
SHORT CALL Vs SHORT CALL BUTTERFLY - When & How to use ?
SHORT CALL
SHORT CALL BUTTERFLY
Market View
Bearish
Neutral
When to use?
It is an aggressive strategy and involves huge risks. It should be used only in case where trader is certain about the bearish market view on the underlying.
This strategy is meant for special scenarios where you foresee a lot of volatility in the market due to election results, budget, policy change, annual result announcements etc.
Action
Sell or Write Call Option
Buy 2 ATM Call, Sell 1 ITM Call, Sell 1 OTM Call
Breakeven Point
Strike Price of Short Call + Premium Received
Lower Break-even = Lower Strike Price + Net Premium, Upper Break-even = Higher Strike Price - Net Premium
SHORT CALL Vs SHORT CALL BUTTERFLY - Risk & Reward
SHORT CALL
SHORT CALL BUTTERFLY
Maximum Profit Scenario
Max Profit = Premium Received
The profit is limited to the net premium received.
Maximum Loss Scenario
Loss Occurs When Price of Underlying > Strike Price of Short Call + Premium Received
Higher strike price- Lower Strike Price - Net Premium
Risk
Unlimited
Limited
Reward
Limited
Limited
SHORT CALL Vs SHORT CALL BUTTERFLY - Strategy Pros & Cons
SHORT CALL
SHORT CALL BUTTERFLY
Similar Strategies
Covered Put, Covered Calls
Long Straddle, Long Call Butterfly
Disadvantage
• Unlimited risk to the upside underlying stocks. • Potential loss more than the premium collected.
• Limited rewards, usually offer smaller return. • Profitability depends on the significant movement of stocks and options prices.
Advantages
• With the help of this strategy, traders can book profit from falling prices in the underlying asset. • Less investment, more profit. • Traders can book profit when underlying stock price fall, move sideways or rise by a small amount.
• Even if the market is highly volatile, the risk exposure remains limited. • Without any extra investment, you can receive your premium. • Able to book profits even when the price movement cannot be predicted.
