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Short Call Butterfly
bullishShort Call Butterfly is a range bound strategy that offers decent reward/risk along with low cost. In scenario where strike difference is not equal its is known as Modified Call Butterfly Spread
Example:
| Instrument | Qty | Price |
|---|---|---|
| BUY NIFTY 30-Jun-26 22600 CE | 65 | 1507.7 |
| SELL NIFTY 30-Jun-26 24100 CE | 130 | 101.25 |
| BUY NIFTY 30-Jun-26 25600 CE | 65 | 0.75 |
When To Execute?
When you are looking to execute a potentially high-yielding trade at a very low cost, where your maximum profit occurs if the stock is at the middle strike price at expiration;Ideal when one is anticipating very low volatility in the stock price
Trade
Buy 1 lot ITM Call, Sell 2 lots ATM Calls and Buy 1 lot OTM Call
Advantages
It helps to participate in high yielding trade with relatively low cost
Being completely hedge one can hold on to the stock till expiry
Promising Reward to risk provides good odds to wins as stock has ample of room to perform
Disadvantages
Time decay is generally harmful when stock is near first strike or third strike and beneficial if stock price is near middle strike
Maximum loss is capped
Strike selection is a key to garner maximum benefit
Maximum Profit
Maximum risk is the net debit of the bought and sold options. Maximum reward is the difference between adjacent strike prices less the net debit. (Strikes are equidistance from each other)
Maximum Loss
It is Net debit Strategy. However Net cost to establish is very low