Long Call Butterfly is first options strategy which is combination of three trades. This is the first technique having more than two techniques in our list. Starting from this point the next ones will have more than 2 trade combinations. Till this point means previous sixteen techniques we discussed had one or two combinations.
It is highly recommended to revisit the previous setups in case you are not comfortable with them. Since understanding this one will require you to have complete conversant with those techniques.
Long Call butterfly should be used if your view about the market is neutral. That is market is not moving in either direction. So if market is range bound or you see low volatility in market then you should use this technique. The market outlook should be direction neutral with low volatility. This strategy will provide you maximum benefit in case of Doji closing.
But if market moves in either direction then there will be loss which is limited in nature compared to the profit. So this is high profit and low loss technique. The trade off is that profit range is narrow but loss range is too wide. So you need to take care of the range for making good profit but in case of volatility the loss is limited. It is combination of below techniques (you can click on the links below to read them in details in case you have not previously.
- Sell 2 ATM Call Option
- Buy 1 ITM Call Option
- Buy 1 OTM Call option
- All of them should be of same expiry and instrument
- The strike prices for At the money (ATM), In the money (ITM) and Out of money (OTM) are equidistant.
- So if you are buying Nifty ATM of 18,000 and ITM of 17,900 (less than 18,000 by 100) then OTM should be 18,100 (more than 100 from 18,000.
You should practice this technique on paper before executing in real life. The reason is simple because it has to satisfy above mentioned conditions. It should be properly planned before executing the setup and without proper understanding and planning of dry run it will be difficult to execute it in real life. You need to get an idea of profit range and loss to make most out of it.
If you are new to Options trading then I would suggest you to watch or read the Getting Started tutorial on Options . That will help you understand the strategies as well. Below videos explain you the concept in details
- When to use the strategy?
- Explanation of the technique with Nifty example
- Profit and loss potential of the technique
- How to create the strategy to maximize return?
English Video
Hindi Video
Conclusion
This is the first technique in our Options trading guide which is combination of more than two trades. So you need to understand it completely before moving forward as future techniques will be more complicated compared to this one. Creating the setup and understanding profit loss potential is key to execute these setup in real trade scenario. So better understand the example given in video along with profit and loss range and potential.
The technique is combination of Long Call and Short Call in case you are not comfortable with these two trades then you can read then in details before proceeding with this video. Note this is combination of three trades all of which needs to be executed in order to create it significantly. You should execute the trades simultaneously or with in span of time to get the premiums same as they get during the entire setup.
The premiums play important role in profit and loss one may have on this setup. It should not be the case that you executed one trade long time before and then waited for long to execute the second or third trade. There should not be much gap between the trades to be executed for proper setup of it.