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Short Call Butterfly-Neutral Strategy

Options-Trading-Beginners

Explanation

A short call butterfly option strategy is opposite of long call butterfly spread. It is a three-part strategy that involves selling and buying call option. Implementation of this option strategy involves selling one higher out-of-the-money (OTM) strike call, buying two middle at-the-money (ATM) strike calls, and selling one lower in-the-money (ITM) strike call. All call options should have the same expiry date, and the distance between the higher and lower strikes must be equal from the middle strike. The short call butterfly option strategy is implemented for a net credit and both profit and loss are limited.

Reward

Maximum profit is realized when the underlying security price at expiration closes above the higher strike call or below the lower strike call.

If prices close above the higher strike call, all the strike will become in the money and the trader implementing this option strategy will make loss on 1 long call but will profit from 2nd long calls.

If the prices of the underlying fall below the lower strike call, all the strikes will become out of the money and trader stand to gain from the premium received.

Risk

Maximum loss will be realized if the underlying price closes near to the long call option. In such scenario, the long call will expire worthless and trader stands to loss from the short lower call.

Construction

Buy 2 ATM Call Options

Sell 1 ITM Call Option

Sell1OTM Call Option

 

Option Type Expiry Date Strike Price LTP Action No. Of Lots
CALL 25/05/2023 43500.0 414.1 Buy 2
CALL 25/05/2023 43400.0 469.65 Sell 1
CALL 25/05/2023 43600.0 367.1 Sell 1

 

Max Risk Max Reward Lower Break Even Upper Break Even
91.45001 8.549988 43608.55 43408.55

 

Market Expiry Payoff 1 Payoff 2 Payoff 3 Net Premium Option PayOff At Expiry
42700.0 0.0 0.0 0.0 8.55 8.55
42800.0 0.0 0.0 0.0 8.55 8.55
42900.0 0.0 0.0 0.0 8.55 8.55
43000.0 0.0 0.0 0.0 8.55 8.55
43100.0 0.0 0.0 0.0 8.55 8.55
43200.0 0.0 0.0 0.0 8.55 8.55
43300.0 0.0 0.0 0.0 8.55 8.55
43400.0 0.0 0.0 0.0 8.55 8.55
43500.0 0.0 -100.0 0.0 8.55 -91.45
43600.0 200.0 -200.0 0.0 8.55 8.55
43700.0 400.0 -300.0 -100.0 8.55 8.55
43800.0 600.0 -400.0 -200.0 8.55 8.55
43900.0 800.0 -500.0 -300.0 8.55 8.55
44000.0 1000.0 -600.0 -400.0 8.55 8.55
44100.0 1200.0 -700.0 -500.0 8.55 8.55
44200.0 1400.0 -800.0 -600.0 8.55 8.55
44300.0 1600.0 -900.0 -700.0 8.55 8.55

 

Payoff Chart

 

Example

Suppose that Bank Nifty is trading at 43500, trader implements Short Call Butterfly option Strategy. He buys 2 Bank Nifty43500 ATM Call Options for a premium of Rs. 815 (415*2), sells 1 NIFTY 43400 ITM Call Option for a premium of Rs. 470 & sells 1 NIFTY 43600 OTM Call Option for a premium of Rs. 360. Since he sold2 Call Options, he will get a credit of Rs. 625 [{(470)+(370)–(815)} *25].

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    Scenario 1:

    At expiry if the NIFTY closes at 42000, then the trader will make a profit from the premium received from the shorting call option of Rs. 625. [{470+370 –(830)} *25]

    Scenario 2:

    At expiry if the NIFTY closes at 43500, then Mr. X will make a loss of Rs. 2250. [{(-100 +470) + 370 -(830)} *25]

    Scenario 3:

    At expiry if the NIFTY closes at 43600, then Mr. X will make a profit of Rs. 1375. [{(-200+470) + ((200-830) + (415)}*25]

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