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Covered Call Vs Long Call Butterfly Options Trading Strategy Comparison

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

Covered Call Vs Long Call Butterfly

  Covered Call Long Call Butterfly
Covered Call Logo Long Call Butterfly Logo
About Strategy A Covered Call is a basic option trading strategy frequently used by traders to protect their huge share holdings. It is a strategy in which you own shares of a company and Sell OTM Call Option of the company in similar proportion. The Call Option would not get exercised unless the stock price increases. Till then you will earn the Premium. This a unlimited risk and limited reward strategy. Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income. Long Call Butterfly is a neutral strategy where very low volatility in the price of underlying is expected. The strategy is a combination of bull Spread and bear Spread. It involves Buy 1 ITM Call, Sell 2 ATM Calls and Buy 1 OTM Call. The strike prices of all Options should be at equal distance from the current price. Suppose Nifty is currently trading at 10400. You expect very little volatility in it. You can implement the Long Call Butterfly by buying 1 ITM Call Option at 10300, selling 2 ATM Nifty Call Options at 10400, buying 1 OTM Call Option at 10500. Ensure that strike prices of Options are at equidistance. Your loss will be limited to the net premium paid on 4 positions while profit will be limited to strike price of short calls.... Read More
Market View Bullish Neutral
Strategy Level Advance Advance
Options Type Call + Underlying Call
Number of Positions 2 4
Risk Profile Unlimited Limited
Reward Profile Limited Limited
Breakeven Point Purchase Price of Underlying- Premium Recieved

When and how to use Covered Call and Long Call Butterfly?

  Covered Call Long Call Butterfly
When to use?

The covered call option strategy works well when you have a mildly Bullish market view and you expect the price of your holdings to moderately rise in future.

This strategy should be used when you're expecting no volatility in the price of the underlying.

Market View Bullish

When you are expecting a moderate rise in the price of the underlying or less volatility.

Neutral

Neutral on the underlying asset and bearish on the volatility.

Action
  • Buy Underlying
  • Sell OTM Call Option

Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income.

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

Breakeven Point Purchase Price of Underlying- Premium Recieved

Upper Breakeven = Higher Strike Price - Net Premium

Lower Breakeven = Lower Strike Price + Net Premium

Compare Risks and Rewards (Covered Call Vs Long Call Butterfly)

  Covered Call Long Call Butterfly
Risks Unlimited

Maximum loss is unlimited and depends on by how much the price of the underlying falls. Loss happens when price of underlying goes below the purchase price of underlying.

Loss = (Purchase Price of Underlying - Price of Underlying) + Premium Received

Limited

Risk in the Long Call Butterfly options strategy is limited to the net premium paid.

Rewards Limited

You earn premium for selling a call. Maximum profit happens when purchase price of underlying moves above the strike price of Call Option.

Max Profit= [Call Strike Price - Stock Price Paid] + Premium Received

Limited

Rewards in the Long Call Butterfly options strategy is limited to the adjacent strikes minus net premium debit.

Maximum Profit Scenario

Underlying rises to the level of the higher strike or above.

Only ITM Call exercised

Maximum Loss Scenario

Underlying below the premium received

All options exercised or all options not exercised.

Pros & Cons or Covered Call and Long Call Butterfly

  Covered Call Long Call Butterfly
Advantages

It helps you generate income from your holdings. Also allows you to benefit from 3 movements of your stocks: rise, sidewise and marginal fall.

Profit earning strategy with limited risk in a less volatile market.

Disadvantage

Unlimited risk for limited reward.

Premiums and brokerage paid on multiple position may eat your profits.

Simillar Strategies Bull Call Spread







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