A Short Call Butterfly involves selling one call option at a lower strike, buying two call options at a middle strike, and selling one call option at a higher strike. It profits from significant price movement outside the range of the middle strike.
- Ideal for high-volatility conditions, where a large price move is expected.
- Strike prices are chosen equidistant, similar to the Long Call Butterfly.
- Risk is capped at the net premium paid, and profit occurs when the price moves significantly beyond the lower or higher strike price.
Example:
- NIFTY trading at 18,000.
- Sell 17,900 Call at ₹200, buy 2 × 18,000 Calls at ₹150 each, and sell 18,100 Call at ₹100 (lot size = 50).
- Outcome:
- If NIFTY moves to 18,300 at expiry:
- Gain on higher strike calls = ₹10,000.
- Loss on lower strike calls = ₹0.
- Net profit = ₹10,000.
- If NIFTY stays at 18,000 at expiry:
- Loss from the middle strike calls = ₹10,000.
- No gain from other options.
- Net loss = ₹10,000.
- If NIFTY moves to 18,300 at expiry: