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Collar Vs Short Call Butterfly Options Trading Strategy Comparison

Compare Collar and Short Call Butterfly options trading strategies. Find similarities and differences between Collar and Short Call Butterfly strategies. Find the best options trading strategy for your trading needs.

Collar Vs Short Call Butterfly

  Collar Short Call Butterfly
Collar Logo Short Call Butterfly Logo
About Strategy A Collar is similar to Covered Call but involves another position of buying a Put Option to cover the fall in the price of the underlying. It involves buying an ATM Put Option & selling an OTM Call Option of the underlying asset. It is a low risk strategy since the Put Option minimizes the downside risk. However, the rewards are also limited and is perfect for conservatively Bullish market view. Suppose you are holding shares of SBI currently trading at Rs 250. You can deploy a collar strategy by selling a Call Option of strike price Rs 300 while at the same time purchasing a Rs 200 strike price Put option. If the price rises to Rs 300, your benefit from increase in value of your holdings and you will lose net premiums. If the price falls... Read More Short Call Butterfly (or Short Butterfly) is a neutral strategy similar to Long Butterfly but bullish on the volatility. This strategy is a limited risk and limited profit strategy. This strategy consists of two long calls at a middle strike (or ATM) and one short call each at a lower and upper strike. All the options must have the same expiration date. Also, the upper and lower strikes (or wings) must both be equidistant from the middle strike (or body). In simple terms, it involves Sell 1 ITM Call, Buy 2 ATM Calls and Sell 1 OTM Call. The strike prices of all Options should be at equal distance from the current price as shown in the example below. The usual Short Butterfly strategy looks like as below for NIFTY current index value as 1... Read More
Market View Bullish Neutral
Strategy Level Advance Advance
Options Type Call + Put + Underlying Call
Number of Positions 3 4
Risk Profile Limited Limited
Reward Profile Limited Limited
Breakeven Point Price of Features - Call Premium + Put Premium 2 Break-even Points

When and how to use Collar and Short Call Butterfly?

  Collar Short Call Butterfly
When to use?

The Collar strategy is perfect if you're Bullish for the underlying you're holding but are concerned with risk and want to protect your losses.

This strategy is meant for special scenarios where you foresee a lot of volatility in the market due to election results, budget, policy change, annual result announcements etc.

Market View Bullish

When you are of the view that the price of the underlying will move up but also want to protect the downside.

Neutral

When you are unsure about the direction in the movement in the price of the underlying but are expecting high volatility in it in the near future.

Action
  • Buy Underlying
  • Buy 1 ATM Put Option
  • Sell 1 OTM Call Option

  • Buy 2 ATM Call
  • Sell 1 ITM Call
  • Sell 1 OTM Call

Breakeven Point Price of Features - Call Premium + Put Premium
2 Break-even Points

There are 2 break even points in this strategy.

  1. Lower Break-even = Lower Strike Price + Net Premium
  2. Upper Break-even = Higher Strike Price - Net Premium

Compare Risks and Rewards (Collar Vs Short Call Butterfly)

  Collar Short Call Butterfly
Risks Limited

You will incur maximum losses when price of the underlying is less than the strike price of the Put Option.

Max Loss = Purchase Price of Underlying - Strike Price of Long Put - Net Premium Received

Limited

The maximum risk is limited.

Maximum Risk = Higher strike price- Lower Strike Price - Net Premium

Rewards Limited

You will incur maximum profit when price of underlying is greater than the strike price of call option.

Max Profit = Strike Price of Short Call - Purchase Price of Underlying + Net Premium Received

Limited

The profit is limited to the net premium received. This happens when the price of the underlying is trading beyond the range of strike prices at expiration date.

Maximum Profit Scenario

Underlying goes up and Call option exercised

All Options exercised or not exercised

Maximum Loss Scenario

Underlying goes down and Put option exercised

Only ITM Call exercised

Pros & Cons or Collar and Short Call Butterfly

  Collar Short Call Butterfly
Advantages

It protects the losses on underlying asset.

This strategy requires no investment as net premium is positive and received. It allows you to benefit from high volatile market scenarios without the need to speculate on the direction of price movement.

Disadvantage

The profit is limited

Profitability depends on significant movement in the price of the underlying.

Simillar Strategies Covered Put Bull, Call Spread, Bull Put Spread Long Straddle, Long Call Butterfly