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Long Combo Vs Short Call Butterfly Options Trading Strategy Comparison

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

Long Combo Vs Short Call Butterfly

  Long Combo Short Call Butterfly
Long Combo Logo Short Call Butterfly Logo
About Strategy A long Combo strategy is a Bullish Trading Strategy employed when a trader is expecting the price of a stock, he is holding to move up. It involves selling an OTM Put and buying an OTM Call. The strategy requires less capital as the cost of Call Option is covered by premium received from Put Option. Say SBI shares are currently trading at Rs 500. You are bullish on it but doesn't want to invest or have capital to do it. You can use Long Combo strategy here by selling a Put option of SBI at strike price of Rs 400 and buying a Call Option at a strike price of Rs 600. You will earn premium on sell Put Option and pay premium on buying Call Option. you are investing less but will benefit if SBI shares rises as per your expectations. 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 Call
Number of Positions 2 4
Risk Profile Unlimited Limited
Reward Profile Unlimited Limited
Breakeven Point Call Strike + Net Premium 2 Break-even Points

When and how to use Long Combo and Short Call Butterfly?

  Long Combo Short Call Butterfly
When to use?

Long Combo strategy should be deployed when you're Bullish on an underlying but don't have the required capital or the risk appetite to invest directly into it.

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 the price of the underlying to move up in near future.

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
  • Sell OTM Put Option
  • Buy OTM Call Option

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

Breakeven Point Call Strike + Net 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 (Long Combo Vs Short Call Butterfly)

  Long Combo Short Call Butterfly
Risks Unlimited

Long Combo is a high risk strategy. You will start losing money when the price of the underlying moves below the lower strike price. Your losses can be unlimited depending on how low the price of underlying falls.

Limited

The maximum risk is limited.

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

Rewards Unlimited

Long Combo is a high return strategy. You will earn profits if the underlying moves above the higher price of the underlying. Your profit will depend on how high the price of the underlying moves.

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 Long Combo and Short Call Butterfly

  Long Combo Short Call Butterfly
Advantages

Brings down the cost of investing in a Bullish stocks. And delivers high returns if prices move up.

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

Losses can be high if prices don't move as expected.

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

Simillar Strategies Long Straddle, Long Call Butterfly