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Short Strangle (Sell Strangle) Vs Short Call Butterfly Options Trading Strategy Comparison

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

Short Strangle (Sell Strangle) Vs Short Call Butterfly

  Short Strangle (Sell Strangle) Short Call Butterfly
Short Strangle (Sell Strangle) Logo Short Call Butterfly Logo
About Strategy The Short Strangle (or Sell Strangle) is a neutral strategy wherein a Slightly OTM Call and a Slightly OTM Put Options are sold simultaneously of same underlying asset and expiry date. This strategy can be used when the trader expects that the underlying stock will experience a very little volatility in the near term. It is a limited profit and unlimited risk strategy. The maximum profit earn is the net premium received. The maximum loss is achieved when the underlying moves either significantly upwards or downwards at expiration. A net credit is taken to enter into this strategy. For this reason, the Short Strangles are Credit Spreads. The usual Short Strangle Strategy looks like as below for NIFTY current index value at 10400 (NIFTY S... 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 two break-even points 2 Break-even Points

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

  Short Strangle (Sell Strangle) Short Call Butterfly
When to use?

The Short Strangle is perfect in a neutral market scenario when the underlying is expected to be less volatile.

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 expecting little volatility and movement in the price of the underlying.

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 Call
  • Sell OTM Put

Sell 1 out-of-the-money put and sell 1 out-of-the-money call which belongs to same underlying asset and has the same expiry date.

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

Breakeven Point two break-even points

A strangle has two break-even points.

Lower Break-even = Strike Price of Put - Net Premium

Upper Break-even = 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 Strangle (Sell Strangle) Vs Short Call Butterfly)

  Short Strangle (Sell Strangle) Short Call Butterfly
Risks Unlimited

The maximum loss is unlimited in this strategy. You will incur losses when the price of the underlying moves significantly either upwards or downwards at expiration.

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

For maximum profit, the price of the underlying on expiration date must trade between the strike prices of the options. The maximum profit is limited to the net premium received while selling the Options.

Maximum Profit = Net 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

Both Option not exercised

All Options exercised or not exercised

Maximum Loss Scenario

One Option exercised

Only ITM Call exercised

Pros & Cons or Short Strangle (Sell Strangle) and Short Call Butterfly

  Short Strangle (Sell Strangle) Short Call Butterfly
Advantages

The strategy offers higher chance of profitability in comparison to Short Straddle due to selling of OTM Options.

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

Limited reward with high risk exposure.

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

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