≡ Menu

How To Trade Short Call Butterfly

Fill this Form to Get 5 Day Free Course on Options And Immediately Get an email to Download eBook on Option Greeks. You can also get an Equity Intraday Strategy for FREE

=====The Article=====

If you have read my post on Long Call Butterfly, this trade will be easy for you to understand. Results for the Short Call Butterfly will be exactly opposite of the Long Call Butterfly.

Lets discuss the trade straight away.

When should you trade Short Call Butterfly?

You should trade this strategy when you think that Nifty will move away from the current strike and expire 100-200 points away on the either side – up or down does not matter.

Three trades are involved (note that these trades are exact opposite of the Long Call Butterfly):

1) Buy 2 lots ATM (at the money) Call Options
2) Sell 1 ITM (in the money) Call Option
3) Sell 1 OTM (out of the money) Call Option

Risk: Limited
Reward: Very Limited

Now lets take a real world example and what profit or loss the trader can make.

(Spot Nifty – 7905. Prices as of August 26, 2014 after markets closed. India VIX (Volatility) – 13.90 – Average. Taking September 2014 expiry as August expiry in 2 days. Option prices rounded off for clarity.)

1) 25-Sep-14 CE 7,900.00: 135.00

Buying 2 Lots = 135*50*2 = 13,500.00 (Debit from account)

2) 25-Sep-14 CE 7,800.00: 200.00

Selling 1 Lot = 200 * 50 * 1 = 10,000.00 (Credit into account)

3) 25-Sep-14 CE 8,000.00: 83.00

Selling 1 Lot = 83 * 50 * 1 = 4150.00 (Credit into account)

Total credit: 10,000 + 4150 – 13,500 = 650 (This is the maximum possible profit)

Total margin blocked: 62000 (approx)

ROI: (650/62000) * 100 = 1.04% in 30 days. In my view this is slightly better than a bank fixed deposit, and at par with many mutual funds. Any strategy that makes less than 2% in 30 days should not be traded. Trading is a business and returns should be attractive.

Return on investment is poor – in fact it is very poor. Such trades with low ROI and high risk are best avoided.

We will now see that risk-reward ratio in this trade is pathetic too – but success rate is good as there will be a movement in Nifty and near expiry if Nifty is away from the strike price of the bought calls – on either side, the trader can book his profits. But unfortunately one loss can take away months of profits. So lets try to find what happens if this trade is successful and what if not.

Lets take an example of when this trade is successful:

Nifty is exactly 200 points above bought call strike price of 7900: 7900 + 200 = 8100 on expiry day.


1) 7900 CE is 200: Profit: 200 – 135 = 65 * 50 * 2 = 6500
2) 7800 CE is 300: Loss: 200 – 300 = -100 * 50 * 1 = -5000
3) 8000 CE is 100: Loss: 100 – 83 = 17 * 50 = -850

Total profit: 6500-5000-850 = 650

Note that profit remains same if Nifty is above this anywhere.

Lets take an example of when this trade is successful on the down side:

Nifty is exactly 200 points below bought call strike price of 7900: 7900 – 200 = 7700 on expiry day.

1) 7900 CE is worthless: Loss: -13500
2) 7800 CE is also worthless: Profit: 10000
3) 8000 CE is also worthless: Profit: 4150

Total Profit: 10000 + 4150 – 13500 = 650

Note that if Nifty is anywhere below this on expiry day, the results will be same. The trader will make a small profit.

Now lets analyze the situations where the trader can make a loss.

Nifty is exactly on 7900 on expiry day – the strike price of the bought calls.

1) 7900 CE is worthless: Loss: -13500
2) 7800 CE is 100: Profit: 200 – 100 = 100 * 50 = 5000
3) 8000 CE is also worthless: Profit:: 4150

Total loss: 5000+4150-13500 = -4350

Nifty at 8000:

1) 7900 CE is 100: Loss: 135 – 100 = 35 * 50 * 2 = -3500
2) 7800 CE is 200: No Profit No Loss as it was 200 = 0
3) 8000 CE is worthless: Profit: 83 * 50 = 4150

Total Profit: 4150-3500 = 650

We have already calculated 8100 and above will be same.

Nifty at 7800:

1) 7900 CE is worthless: Loss: -13500
2) 7800 CE is also worthless: Profit: 10000
3) 8000 CE is also worthless: Profit: 4150

Total Profit: 10000 + 4150 – 13500 = 650

We have already calculated 7700 and below, the results will be same.

So what do you make out from this trade? This is one of the worst trades to try out. Agreed mostly you will make a profit, but one loss will take away nearly 7 months of profits (4350/650 = 6.7). I have not even added the brokerage to this profit of 650. 4+4 = 8 trades are involved to open and to close. Calculate yourself what kind of profits remains even if this trade is successful most of the times.

My advice: Stay away from such trades when risk-reward is pathetic and on top of that you may be hoping that Nifty is nowhere near the bought strike price during the expiry week.

How To Adjust A Short Call Butterfly:

This is also a set-and-forget trade. If you see profits (even a small one) on any day before expiry – it is advised that you close the trade because at any cost you should not take the maximum loss.

If you keep rolling over whenever Nifty comes near the bought calls strike – you will take a loss every time you do. Therefore rollover is not recommended.

You cannot wait till expiry as this trade can make a big loss on that day. Also you will not get good profits when Nifty is away from the bought calls strike price and expiry is not near. When you close it few days before expiry, you may make some money but that will be less than the max profit. On top of that, eight transaction will involve a lot of money in brokerage.

Therefore this is a trade better avoided.

Have you ever traded a Short Call Butterfly? I am eager to know the results.

What you should do now

1. If you have still not subscribed for my free 5 days course you can do by filling the form above. You will learn a lot about option trading.

2. If you are a new option trader, not much experienced and are making losses you can do my paid course. I recommend Nifty Conservative Option Course for beginners because it is easy to understand and easy to trade. Even a 18 year old young trader or a housewife can learn it and start trading from next day. It will help you to earn consistent monthly income without any software or speculation or stress or big risk. You will learn proper hedging strategies that works in any market condition.

3. If you are banknifty weekly options trader you can do my Bank Nifty Weekly Options & Futures Strategy Course. You will learn future and option hedging strategies that works in volatile market condition.

NOTE: Here is one more help. You can open a trading account in UPSTOX and send me a WhatsApp message on 9051143004. I will send you a FREE Equity Intraday Strategy that you can start trading and make approx 200 a day. You need 5000 to start trading this strategy.

CLICK HERE AND REGISTER IMMEDIATELY TO OPEN AN ACCOUNT IN UPSTOX. If you do not register immediately you will not be mapped under me which is very important to get the free strategy.

UPSTOX is a low cost broker where buying and selling of stocks is FREE.


What Traders Say About My Course

Course fees: Click here to know the course fees.

Here is complete process of my course

1. Once you pay I will send you the course materials for studying to your email.
2. You read and ask me questions via phone/whatsapp/email to clear doubts.
3. Then you start paper trading and still can ask me questions.
4. After about one month you can start trading.
5. Since doubts can come anytime the support will be there for one year.

Within one month you can start trading on your own. No need to depend on anyone once you are on your own.

If you have any question you can contact me.

You can read about me here and my trading mistakes here.

TheOptionCourse.com Copyright @ All Rights Reserved
Dilip Shaw, Founder

Copyright Infringement: Any act of copying, reproducing or distributing any content in the site or newsletters, whether wholly or in part, for any purpose without my permission is strictly prohibited and shall be deemed to be copyright infringement.

INCOME DISCLAIMER: Any references in this site of income made by the traders are given to me by them either through Email or WhatsApp as a Thank You message. However every trade depends on the trader and his level of risk taking capability, knowledge and experience. Moreover stock market investments and trading are subject to market risks. Therefore there is no guarantee that everyone will achieve the same or similar results. My aim is to make you a better & disciplined trader with the stock trading and investing education and strategies you get from this website. Please note that I DO NOT give tips or advisory services by SMS, Email, or WhatsApp or any other form of social media. I strictly adhere to laws of my country. I only offer education on finance, investments on stock markets in the best possible way as much as I can through this website. Still, you must consult an authorized advisor or do thorough research before investing in any stock or derivative before trading any strategy given in this website. I am not responsible for any investment decision you take after reading any article given in this website. Knowledge is the only way to get success in stock markets. I try my best to give stock market investing and trading knowledge through the articles posted in this website. Thanks for visiting my website.

Trading The Short Put Butterfly Strategy
How To Trade Long Call Butterfly

About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

{ 0 comments… add one }

Leave a Comment