Short Call Butterfly Strategy is an options strategy which is used in volatile markets. It is the inverse of Long Call Butterfly and is not a range-bound strategy. Short Call Butterfly requires selling one lower strike ITM call, buying two ATM calls, and selling another higher strike OTM call.
When to Use the Short Call Butterfly Strategy
This strategy is suitable for those who are neutral about market direction but are bullish about volatility—expecting big price moves in either direction.
Example of the Short Call Butterfly Strategy
For instance, the Nifty index is at 3200. Mr. XYZ expects high volatility but is not aware of the direction. He purchases two ATM calls of Nifty at 3200, sells one ITM call at 3100, and sells one OTM call at 3300. A net credit of Rs. 9.75 is obtained.
Risk and Reward Profile
Although this strategy provides a low return, it has controlled risk, and it is ideal for risky markets. Yet, compared to other options such as straddles or strangles, it is lower in potential returns but modestly lower in risk.
Conclusion
The Short Call Butterfly strategy is a good strategy for traders expecting high volatility but unaware of the direction of the market. It offers a prescribed risk-reward ratio with minimal risk and reward, which acts as a valuable choice in terms of volatility.
