Covered Call Vs Short Call Butterfly Options Trading Strategy Comparison

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

Covered Call Vs Short Call Butterfly

	Covered Call	Short Call Butterfly


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.	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 + Underlying	Call
Number of Positions	2	4
Risk Profile	Unlimited	Limited
Reward Profile	Limited	Limited
Breakeven Point	Purchase Price of Underlying- Premium Recieved	2 Break-even Points

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

	Covered Call	Short 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 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 expecting a moderate rise in the price of the underlying or less volatility.	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 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.	Buy 2 ATM Call Sell 1 ITM Call Sell 1 OTM Call
Breakeven Point	Purchase Price of Underlying- Premium Recieved	2 Break-even Points There are 2 break even points in this strategy. Lower Break-even = Lower Strike Price + Net Premium Upper Break-even = Higher Strike Price - Net Premium

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

	Covered Call	Short 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 The maximum risk is limited. Maximum Risk = Higher strike price- Lower Strike Price - Net Premium
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 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 rises to the level of the higher strike or above.	All Options exercised or not exercised
Maximum Loss Scenario	Underlying below the premium received	Only ITM Call exercised

Pros & Cons or Covered Call and Short Call Butterfly

	Covered Call	Short 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.	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	Unlimited risk for limited reward.	Profitability depends on significant movement in the price of the underlying.
Simillar Strategies	Bull Call Spread	Long Straddle, Long Call Butterfly

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