LONG CALL BUTTERFLY STRATEGY

What is a Long Call Butterfly?

A long call butterfly is an options trading strategy that involves three different call options with the same expiration date but different strike prices. Here's how it works.

1. You have to buy one call option at a lower strike price near the “In the Money” option.
2. You have to sell two call options at a middle strike price above or sell the “At the money” option.
3. You have to buy one call option at a higher strike price full “Out the money” option.

This strategy works very well when the market is in a neutral situation, in which there is no possibility of the market going down but there is also no hope of seeing much rise in the market. In the "Long call butterfly strategy”, the profit is expected to be higher and in comparison, the loss is less. This strategy is not at all for the volatile market and bearish market, so if there is only a slight upside in the market, then this strategy can be easily used.

How to make a Long Call Butterfly strategy?

To create the "Long call butterfly strategy”, you have to create 3 positions in the call option with different strike prices. Let us briefly understand how to create a long call butterfly strategy, for example, we will take the help of the Nifty option chain and Nifty index price.

As shown in the option chain above, NIFTY is trading at 24768 and 24750 is “At the money”, where we are thinking that Nifty can go up to 24800 to 24900 levels, Where we have to make a Long Call Butterfly strategy. 

To creat, 1st Position buy 1lot, near In the money option Nifty 24700CE at ₹202

To creat, 2nd Position sell 2lot, Slide or above At the money option Nifty 24850CE at ₹120

To creat, 3rd Position buy 1lot, full Out the money option Nifty 25000CE at ₹63

Now here we calculate the premium for all three positions.

(PAID PREMIUM) NIFTY 24700CE ₹202 = 202*25= ₹5050

(RECEIVED PREMIUM) NIFTY 24850CE ₹120 = 120*50= ₹6000

(PAID PREMIUM) NIFTY 25000CE ₹63 = 63*25= ₹1575

Total Buy Position (NIFTY 24700CE +NIFTY25000CE) 5050+1575= ₹6625

Total sell position (NIFTY 24850CE 2 LOT) = ₹6000

Total Premium Paid = Total Buy Positions – Total Sell Positions

                                 = 6625-6000=₹625

The total premium we have paid to create the position can result in a maximum loss of ₹625 if the market falls or the market moves higher.

Now let us see where we can get profit, for this the pay off graph is shown below.

NOTE:- To make a "Long call butterfly strategy”, first make a buying position, then make a selling position, but when you have to exit the position, the first square of the selling position. , then square off the buying position.
 

How much money will be required?

It may cost ₹95000 to ₹120000 to create a "Long call butterfly strategy”, and also depend on the index and lot size.

Advantages of Long Call Butterfly strategy

There's a lot to like about this strategy:

1. Limited risk and higher reward.
2. Potential for high percentage returns.
3. Works well in a low-volatility market.
4. Can be adjusted as the market moves.

What should be Risk and Reward?

One of the great things about a long-call butterfly is that your risk is limited. Here's what you need to know:

1. Maximum loss: The most you can lose is the net premium paid for the trade.
2. Maximum profit: Your best-case scenario is when the stock price is exactly at the middle strike price at expiration.
3. Break-even points: There are two – slightly above the lower strike and slightly below the higher strike.