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Long Strangle (Buy Strangle) Vs Short Call Butterfly Options Trading Strategy Comparison

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

Long Strangle (Buy Strangle) Vs Short Call Butterfly

  Long Strangle (Buy Strangle) Short Call Butterfly
Long Strangle (Buy Strangle) Logo Short Call Butterfly Logo
About Strategy The Long Strangle (or Buy Strangle or Option Strangle) is a neutral strategy wherein Slightly OTM Put Options and Slightly OTM Call are bought simultaneously with same underlying asset and expiry date. This strategy can be used when the trader expects that the underlying stock will experience significant volatility in the near term. It is a limited risk and unlimited reward strategy. The maximum loss is the net premium paid while maximum profit is achieved when the underlying moves either significantly upwards or downwards at expiration. The usual Long Strangle Strategy looks like as below for NIFTY current index value at 10400 (NIFTY Spot Price): Options Strangle Orders OrdersNIFTY Strike Price Buy 1 Slightly OTM PutN... 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 Neutral Neutral
Strategy Level Beginners Advance
Options Type Call + Put Call
Number of Positions 2 4
Risk Profile Limited Limited
Reward Profile Unlimited Limited
Breakeven Point two break-even points 2 Break-even Points

When and how to use Long Strangle (Buy Strangle) and Short Call Butterfly?

  Long Strangle (Buy Strangle) Short Call Butterfly
When to use?

A Long Strangle 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.

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 Neutral

When you are unsure of the direction of the underlying but expecting high volatility in it.

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 OTM Call Option
  • Buy OTM Put Option

Suppose Nifty is currently at 10400 and you expect the price to move sharply but are unsure about the direction. In such a scenario, you can execute long strangle strategy by buying Nifty at 10600 and at 10800. The net premium paid will be your maximum loss while the profit will depend on how high or low the index moves.

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

Breakeven Point two break-even points

A Options Strangle strategy has two break-even points.

Lower Breakeven Point = Strike Price of Put - Net Premium

Upper Breakeven Point = Strike Price of Call + 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 Strangle (Buy Strangle) Vs Short Call Butterfly)

  Long Strangle (Buy Strangle) Short Call Butterfly
Risks Limited

Max Loss = Net Premium Paid

The maximum loss is limited to the net premium paid in the long strangle strategy. It occurs when the price of the underlying is trading between the strike price of Options.

Limited

The maximum risk is limited.

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

Rewards Unlimited

Maximum profit is achieved when the underlying moves significantly up and down at expiration.

Profit = Price of Underlying - Strike Price of Long Call - Net Premium Paid

Or

Profit = Strike Price of Long Put - Price of Underlying - Net Premium Paid

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

One Option exercised

All Options exercised or not exercised

Maximum Loss Scenario

Both Option not exercised

Only ITM Call exercised

Pros & Cons or Long Strangle (Buy Strangle) and Short Call Butterfly

  Long Strangle (Buy Strangle) Short Call Butterfly
Advantages

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 strategy requires significant price movements in the underlying to gain profits.

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

Simillar Strategies Long Straddle, Short Strangle Long Straddle, Long Call Butterfly
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