Short Call Butterfly (Buy 2 ATM Call, Sell 1 ITM Call, Sell 1 OTM Call)

Short Call Butterfly (Buy 2 ATM Call, Sell 1 ITM Call, Sell 1 OTM Call)

A Short Call Butterfly is a strategy for volatile markets. It is the opposite of Long Call Butterfly, which is a range bound strategy. The Short Call Butterfly can be constructed by Selling one lower striking in-the-money Call, buying two at-the-money Calls and selling another higher strike out-of-the-money Call, giving the investor a net credit (therefore it is an income strategy). There should be equal distance between each strike. The resulting position will be profitable in case there is a big move in the stock / index.

Market Scenario: You are neutral on market direction and bullish on volatility.

Risk: Limited (net difference between the adjacent strikes (Rs. 100 in this example) - premium

Reward: Limited to the net premium received

BEP:   Upper BEP = Strike Price of Highest Strike Short Call - Net Premium Received

            Lower BEP = Strike Price of Lowest Strike Long Call + Net Premium Received

EXAMPLE:
Entry:

SPOT

5000

	STRIKE	PREMIUM
SELL 1 ITM CALL	4900	122
BUY 2 ATM CALL	5000	80*2 = 160
SELL 1 OTM CALL	5100	41

UPPER BEP: 5100 - 3 = 5097                                               LOWER BEP: 4900 + 3 = 4903

On Exit if:

SPOT	ITM CALL	ATM CALL	OTM CALL	STRATEGY PAY-OFF
4700	122	-160	41	3
4800	122	-160	41	3
4900	122	-160	41	3
4903	119	-160	41	0
5000	22	-160	41	-97
5097	-75	34	41	0
5100	-78	40	41	3
5200	-178	240	-59	3
5300	-278	440	-159	3

Short Call Butterfly - Strategy Pay-Off