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
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
SHORT CALL Vs LONG CALL BUTTERFLY - When & How to use ?
SHORT CALL
LONG 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 should be used when you're expecting no volatility in the price of the underlying.
Action
Sell or Write Call Option
Sell 2 ATM Call, Buy 1 ITM Call, Buy 1 OTM Call
Breakeven Point
Strike Price of Short Call + Premium Received
Upper Breakeven = Higher Strike Price - Net Premium, Lower Breakeven = Lower Strike Price + Net Premium
SHORT CALL Vs LONG CALL BUTTERFLY - Risk & Reward
SHORT CALL
LONG CALL BUTTERFLY
Maximum Profit Scenario
Max Profit = Premium Received
Adjacent strikes - Net premium debit.
Maximum Loss Scenario
Loss Occurs When Price of Underlying > Strike Price of Short Call + Premium Received
Net Premium Paid
Risk
Unlimited
Limited
Reward
Limited
Limited
SHORT CALL Vs LONG CALL BUTTERFLY - Strategy Pros & Cons
SHORT CALL
LONG CALL BUTTERFLY
Similar Strategies
Covered Put, Covered Calls
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Disadvantage
• Unlimited risk to the upside underlying stocks. • Potential loss more than the premium collected.
• 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
• 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.
• 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.
