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.
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
LONG CALL Vs SHORT CALL BUTTERFLY - When & How to use ?
LONG CALL
SHORT 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 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
Buying Call option
Buy 2 ATM Call, Sell 1 ITM Call, Sell 1 OTM Call
Breakeven Point
Strike price + Premium
Lower Break-even = Lower Strike Price + Net Premium, Upper Break-even = Higher Strike Price - Net Premium
LONG CALL Vs SHORT CALL BUTTERFLY - Risk & Reward
LONG CALL
SHORT CALL BUTTERFLY
Maximum Profit Scenario
Underlying Asset close above from the strike price on expiry.
The profit is limited to the net premium received.
Maximum Loss Scenario
Premium Paid
Higher strike price- Lower Strike Price - Net Premium
Risk
Limited
Limited
Reward
Unlimited
Limited
LONG CALL Vs SHORT CALL BUTTERFLY - Strategy Pros & Cons
LONG CALL
SHORT CALL BUTTERFLY
Similar Strategies
Protective Put
Long Straddle, Long Call Butterfly
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.
• Limited rewards, usually offer smaller return. • Profitability depends on the significant movement of stocks and options prices.
Advantages
• Less investment, more profit. • Unlimited profit with limited risk. • High leverage than simply owning the stock.
• 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.
