This is one of the basic strategies as it involves entering into one position i.e. buying the Call Option only. Any investor who buys the Call Option will be bullish in nature and would be expecting the market to give decent returns in the near future.
A trader, who is neutral in nature and believes that there will be very low volatility i.e. expects the market to remain range bound, will implement this strategy. This strategy involves selling of 2 ATM Call Options, buying 1 ITM Call Option & buying 1 OTM Call Option of the same expiry date & same underlying asset. The difference between the strikes sho ..
Upper Breakeven = Higher Strike Price - Net Premium, Lower Breakeven = Lower Strike Price + Net Premium
LONG CALL Vs LONG CALL BUTTERFLY - When & How to use ?
LONG CALL
LONG CALL BUTTERFLY
Market View
Bullish (Any investor who buys the Call Option will be bullish in nature and would be expecting the market to give decent returns in the near future.)
Neutral
When to use?
This strategy work when an investor expect the underlying instrument move in upward direction.
This strategy should be used when you're expecting no volatility in the price of the underlying.
Action
Buying Call option
Sell 2 ATM Call, Buy 1 ITM Call, Buy 1 OTM Call
Breakeven Point
Strike price + Premium
Upper Breakeven = Higher Strike Price - Net Premium, Lower Breakeven = Lower Strike Price + Net Premium
LONG CALL Vs LONG CALL BUTTERFLY - Risk & Reward
LONG CALL
LONG CALL BUTTERFLY
Maximum Profit Scenario
Underlying Asset close above from the strike price on expiry.
Adjacent strikes - Net premium debit.
Maximum Loss Scenario
Premium Paid
Net Premium Paid
Risk
Limited
Limited
Reward
Unlimited
Limited
LONG CALL Vs LONG CALL BUTTERFLY - Strategy Pros & Cons
LONG CALL
LONG CALL BUTTERFLY
Similar Strategies
Protective Put
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Disadvantage
• In this strategy, there is not protection against the underlying stock falling in value. • 100% loss if the strike price, expiration dates or underlying stocks are badly chosen.
• Due to limited lifespan of call options, you can lose the premium paid. • Limited profit which is bound in a narrow range between the two wing strikes.
Advantages
• Less investment, more profit. • Unlimited profit with limited risk. • High leverage than simply owning the stock.
• Under this strategy, a trader can book profit even when there is not volatility in the market. • Limited risks to the net premium paid. • This strategy allows you to gain more profits by investing less and limiting your losses to minimum.
