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Short Call (Naked Call) Vs Short Call Butterfly Options Trading Strategy Comparison

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

Short Call (Naked Call) Vs Short Call Butterfly

  Short Call (Naked Call) Short Call Butterfly
Short Call (Naked Call) Logo Short Call Butterfly Logo
About Strategy Short Call (or Naked Call) strategy involves the selling of the Call Options (or writing call option). In this strategy, a trader is Very Bearish in his market view and expects the price of the underlying asset to go down in near future. This strategy is highly risky with potential for unlimited losses and is generally preferred by experienced traders. The strategy involves taking a single position of selling a Call Option of any type i.e. ITM or OTM. These naked calls are also known as Out-Of-The-Money Naked Call and In-The-Money Naked Call based on the type you choose. This strategy has limited rewards (max profit is premium received) and unlimited loss potential. When the trader goes short on call, the trader sells a call option and e... 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 Bearish Neutral
Strategy Level Advance Advance
Options Type Call Call
Number of Positions 1 4
Risk Profile Unlimited Limited
Reward Profile Limited Limited
Breakeven Point Strike Price of Short Call + Premium Received 2 Break-even Points

When and how to use Short Call (Naked Call) and Short Call Butterfly?

  Short Call (Naked Call) Short Call Butterfly
When to use?

It is an aggressive strategy and involves huge risks. It should be used only in case where trader is certain about the bearish market view on the underlying.

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 Bearish

When you are expecting the price of the underlying or its volatility to only moderately increase.

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 Call Option

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

Breakeven Point Strike Price of Short Call + Premium Received

Break even is achieved when the price of the underlying is equal to total of strike price and premium received.

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 (Short Call (Naked Call) Vs Short Call Butterfly)

  Short Call (Naked Call) Short Call Butterfly
Risks Unlimited

There risk is unlimited and depend on how high the price of the underlying moves.

Limited

The maximum risk is limited.

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

Rewards Limited

The profit is limited to the 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

When underline asset goes down and option not exercised.

  • Max Profit = Premium Received
  • Max Profit Achieved When Price of Underlying <= Strike Price of Short Call

All Options exercised or not exercised

Maximum Loss Scenario

When underline asset goes up and option exercised.

  • Maximum Loss = Unlimited
  • Loss Occurs When Price of Underlying > Strike Price of Short Call + Premium Received
  • Loss = Price of Underlying - Strike Price of Short Call - Premium Received

Only ITM Call exercised

Pros & Cons or Short Call (Naked Call) and Short Call Butterfly

  Short Call (Naked Call) Short Call Butterfly
Advantages

This strategy allows you to profit from falling prices in the 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

There's unlimited risk on the upside as you are selling Option without holding the underlying.

Rewards are limited to premium received only.

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

Simillar Strategies Covered Put, Covered Calls, Bear Call Spread Long Straddle, Long Call Butterfly