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Short Straddle (Sell Straddle or Naked Straddle) Vs Short Call Butterfly Options Trading Strategy Comparison

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

Short Straddle (Sell Straddle or Naked Straddle) Vs Short Call Butterfly

  Short Straddle (Sell Straddle or Naked Straddle) Short Call Butterfly
Short Straddle (Sell Straddle or Naked Straddle) Logo Short Call Butterfly Logo
About Strategy The Short Straddle (or Sell Straddle or naked Straddle) is a neutral options strategy. This strategy involves simultaneously selling a call and a put option of the same underlying asset, same strike price and same expire date. A Short Straddle strategy is used in case of little volatility market scenarios wherein you expect none or very little movement in the price of the underlying. Such scenarios arise when there is no major news expected until expire. This is a limited profit and unlimited loss strategy. The maximum profit earned when, on expire date, the underlying asset is trading at the strike price at which the options are sold. The maximum loss is unlimited and occurs when underlying asset price moves sharply in upward or down... 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 Advance Advance
Options Type Call + Put Call
Number of Positions 2 4
Risk Profile Unlimited Limited
Reward Profile Limited Limited
Breakeven Point 2 Breakeven Points 2 Break-even Points

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

  Short Straddle (Sell Straddle or Naked Straddle) Short Call Butterfly
When to use?

This strategy is to be used when you expect a flat market in the coming days with very less movement in the prices of underlying asset.

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 trader don't expect much movement in its price 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 Call Option
  • Sell Put Option

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

Breakeven Point 2 Breakeven Points

There are 2 break even points in this strategy. The upper break even is hit when the underlying price is equal to the total of strike price of short call and net premium paid. The lower break even is hit when the underlying price is equal to the difference between strike price of short Put and net premium paid.

Break-even points:

Lower Breakeven = Strike Price of Put - Net Premium

Upper breakeven = 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 (Short Straddle (Sell Straddle or Naked Straddle) Vs Short Call Butterfly)

  Short Straddle (Sell Straddle or Naked Straddle) Short Call Butterfly
Risks Unlimited

There is a possibility of unlimited loss in the short straddle strategy. The loss occurs when the price of the underlying significantly moves upwards and downwards.

Loss = Price of Underlying - Strike Price of Short Call - Net Premium Received

Or

Loss= Strike Price of Short Put - Price of Underlying - Net Premium Received

Limited

The maximum risk is limited.

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

Rewards Limited

Maximum profit is limited to the net premium received. The profit is achieved when the price of the underlying is equal to either strike price of short Call or Put.

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 Both Option not exercised

All Options exercised or not exercised

Maximum Loss Scenario

One Option exercised

Only ITM Call exercised

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

  Short Straddle (Sell Straddle or Naked Straddle) Short Call Butterfly
Advantages

It allows you to benefit from double time decay and earn profit in a less volatile scenario.

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 losses if the price of the underlying move significantly in either direction.

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

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