Nifty Options Strategies - ButterFly


In option trading several strategies, involving various strike prices, can be designed based on your view on the markets. Strategy should be designed keeping your view on the market.

Do you think markets will go up? (Bullish)
Do you think markets will go down? (Bearish)
Do you think markets will trade sideways? (Neutral)

If your view on market is bullish or bearish, Long butterfly strategy is not going to help you. Long butterfly strategy needs to be designed if you expect markets to trade sideways i.e. you have a neutral view on markets.

How to design a Long butterfly strategy?

A long butterfly strategy can be designed by:-

1.    Buying 1 In the Money Call Option (ITM CE)
2.    Selling 2 At the Money Call Option (ATM CE)
3.    Buying 1 Out of the Money Call Option (OTM CE)

We can see that a Long butterfly strategy involves three different strike prices call options. One is ITM, One is OTM and the ones which we are shorting are the ATM call options. Let’s understand the same strategy with reference to NIFTY as underlying.

Let’s assume following:-

Nifty is currently trading at 4600 levels i.e. Current market price (CMP) = 4600
ITM CE: Nifty call option with strike price 8000 is trading at 112 (call premium)
OTM CE: Nifty call option with strike price 8200 is trading at 15 (call premium)
ATM CE: Nifty call option with strike price 8100 is trading at 10 (call premium)
With these assumed values we will now design a Long butterfly strategy.

For designing same we will do the following:-
Action 
Strike price
Call premium
Cash flow 
Buy (1)  Nifty CE 
8000
112
(112  x  50)= 5,600
Buy (1)  Nifty CE 
8200
20
(20   x  50) = 1,000
Sell (2)  Nifty CE 
8100
50
50 x  100 = 5000

The total investment needed for this particular strategy     = (5600) + (1000) – 5000 = 1600

We received a cash inflow of Rs 5000 by selling 2 lots of NIFTY ATM CE & we paid in total 5600 & 1000 Rs (Rs 6600) for buying the call options.

Now let’s study the pay off for this strategy assuming various expiry prices for the underlying i.e. Nifty.
Expiry closing
Buy ITM 
Buy OTM
Sell ATM
Net payoff
8000 Nifty @112
8200 Nifty @ 20
8100 Nifty @50 
4200
-112
-20
100
-32
4400
-112
-20
100
-32
4500
-112
-20
100
-32
4600
-12
-20
100
68
4700
88
-20
-100
-32
4800
188
80
-300
-32
4900
288
180
-500
-32

In the above payoff table we can see that maximum profit for a long butterfly strategy occurs when the expiry price is closest to the Strike price of the ATM call option i.e 4600.
In option trading several strategies, involving various strike prices, can be designed based on your view on the markets. Strategy should be designed keeping your view on the market.

Do you think markets will go up? (Bullish)
Do you think markets will go down? (Bearish)
Do you think markets will trade sideways? (Neutral)

If your view on market is bullish or bearish, Long butterfly strategy is not going to help you. Long butterfly strategy needs to be designed if you expect markets to trade sideways i.e. you have a neutral view on markets.

How to design a Long butterfly strategy?

A long butterfly strategy can be designed by:-

1.    Buying 1 In the Money Call Option (ITM CE)
2.    Selling 2 At the Money Call Option (ATM CE)
3.    Buying 1 Out of the Money Call Option (OTM CE)

We can see that a Long butterfly strategy involves three different strike prices call options. One is ITM, One is OTM and the ones which we are shorting are the ATM call options. Let’s understand the same strategy with reference to NIFTY as underlying.

Let’s assume following:-

Nifty is currently trading at 4600 levels i.e. Current market price (CMP) = 4600
ITM CE: Nifty call option with strike price 4500 is trading at 112 (call premium)
OTM CE: Nifty call option with strike price 4700 is trading at 15 (call premium)
ATM CE: Nifty call option with strike price 4600 is trading at 10 (call premium)
With these assumed values we will now design a Long butterfly strategy.

For designing same we will do the following:-

Action  Strike price Call premium Cash flow 
Buy (1)  Nifty CE  4500 112 (112  x  50)= 5,600
Buy (1)  Nifty CE  4700 20 (20   x  50) = 1,000
Sell (2)  Nifty CE  4600 50 50 x  100 = 5000

The total investment needed for this particular strategy     = (5600) + (1000) – 5000 = 1600

We received a cash inflow of Rs 5000 by selling 2 lots of NIFTY ATM CE & we paid in total 5600 & 1000 Rs (Rs 6600) for buying the call options.

Now let’s study the pay off for this strategy assuming various expiry prices for the underlying i.e. Nifty.

Expiry closing Buy ITM  Buy OTM Sell ATM Net payoff
4500 Nifty @112 4700 Nifty @ 20 4600 Nifty @50 
4200 -112 -20 100 -32
4400 -112 -20 100 -32
4500 -112 -20 100 -32
4600 -12 -20 100 68
4700 88 -20 -100 -32
4800 188 80 -300 -32
4900 288 180 -500 -32

In the above payoff table we can see that maximum profit for a long butterfly strategy occurs when the expiry price is closest to the Strike price of the ATM call option i.e 4600.

This proves that butterfly strategy is profitable only when the markets do not move up or down but manage to trade sideways and most importantly close at levels near to the ATM call options strike price. - See more at: http://www.dsij.in/article-details/articleid/3315/what-is-the-long-butterfly-strategy.aspx#sthash.fXAAJopv.dpuf
In option trading several strategies, involving various strike prices, can be designed based on your view on the markets. Strategy should be designed keeping your view on the market.

Do you think markets will go up? (Bullish)
Do you think markets will go down? (Bearish)
Do you think markets will trade sideways? (Neutral)

If your view on market is bullish or bearish, Long butterfly strategy is not going to help you. Long butterfly strategy needs to be designed if you expect markets to trade sideways i.e. you have a neutral view on markets.

How to design a Long butterfly strategy?

A long butterfly strategy can be designed by:-

1.    Buying 1 In the Money Call Option (ITM CE)
2.    Selling 2 At the Money Call Option (ATM CE)
3.    Buying 1 Out of the Money Call Option (OTM CE)

We can see that a Long butterfly strategy involves three different strike prices call options. One is ITM, One is OTM and the ones which we are shorting are the ATM call options. Let’s understand the same strategy with reference to NIFTY as underlying.

Let’s assume following:-

Nifty is currently trading at 4600 levels i.e. Current market price (CMP) = 4600
ITM CE: Nifty call option with strike price 4500 is trading at 112 (call premium)
OTM CE: Nifty call option with strike price 4700 is trading at 15 (call premium)
ATM CE: Nifty call option with strike price 4600 is trading at 10 (call premium)
With these assumed values we will now design a Long butterfly strategy.

For designing same we will do the following:-


Action  Strike price Call premium Cash flow 
Buy (1)  Nifty CE  4500 112 (112  x  50)= 5,600
Buy (1)  Nifty CE  4700 20 (20   x  50) = 1,000
Sell (2)  Nifty CE  4600 50 50 x  100 = 5000

The total investment needed for this particular strategy     = (5600) + (1000) – 5000 = 1600

We received a cash inflow of Rs 5000 by selling 2 lots of NIFTY ATM CE & we paid in total 5600 & 1000 Rs (Rs 6600) for buying the call options.

Now let’s study the pay off for this strategy assuming various expiry prices for the underlying i.e. Nifty.


Expiry closing Buy ITM  Buy OTM Sell ATM Net payoff
4500 Nifty @112 4700 Nifty @ 20 4600 Nifty @50 
4200 -112 -20 100 -32
4400 -112 -20 100 -32
4500 -112 -20 100 -32
4600 -12 -20 100 68
4700 88 -20 -100 -32
4800 188 80 -300 -32
4900 288 180 -500 -32

In the above payoff table we can see that maximum profit for a long butterfly strategy occurs when the expiry price is closest to the Strike price of the ATM call option i.e 4600.

This proves that butterfly strategy is profitable only when the markets do not move up or down but manage to trade sideways and most importantly close at levels near to the ATM call options strike price. - See more at: http://www.dsij.in/article-details/articleid/3315/what-is-the-long-butterfly-strategy.aspx#sthash.fXAAJopv.dpuf
In option trading several strategies, involving various strike prices, can be designed based on your view on the markets. Strategy should be designed keeping your view on the market.

Do you think markets will go up? (Bullish)
Do you think markets will go down? (Bearish)
Do you think markets will trade sideways? (Neutral)

If your view on market is bullish or bearish, Long butterfly strategy is not going to help you. Long butterfly strategy needs to be designed if you expect markets to trade sideways i.e. you have a neutral view on markets.

How to design a Long butterfly strategy?

A long butterfly strategy can be designed by:-

1.    Buying 1 In the Money Call Option (ITM CE)
2.    Selling 2 At the Money Call Option (ATM CE)
3.    Buying 1 Out of the Money Call Option (OTM CE)

We can see that a Long butterfly strategy involves three different strike prices call options. One is ITM, One is OTM and the ones which we are shorting are the ATM call options. Let’s understand the same strategy with reference to NIFTY as underlying.

Let’s assume following:-

Nifty is currently trading at 4600 levels i.e. Current market price (CMP) = 4600
ITM CE: Nifty call option with strike price 4500 is trading at 112 (call premium)
OTM CE: Nifty call option with strike price 4700 is trading at 15 (call premium)
ATM CE: Nifty call option with strike price 4600 is trading at 10 (call premium)
With these assumed values we will now design a Long butterfly strategy.

For designing same we will do the following:-


Action  Strike price Call premium Cash flow 
Buy (1)  Nifty CE  4500 112 (112  x  50)= 5,600
Buy (1)  Nifty CE  4700 20 (20   x  50) = 1,000
Sell (2)  Nifty CE  4600 50 50 x  100 = 5000

The total investment needed for this particular strategy     = (5600) + (1000) – 5000 = 1600

We received a cash inflow of Rs 5000 by selling 2 lots of NIFTY ATM CE & we paid in total 5600 & 1000 Rs (Rs 6600) for buying the call options.

Now let’s study the pay off for this strategy assuming various expiry prices for the underlying i.e. Nifty.


Expiry closing Buy ITM  Buy OTM Sell ATM Net payoff
4500 Nifty @112 4700 Nifty @ 20 4600 Nifty @50 
4200 -112 -20 100 -32
4400 -112 -20 100 -32
4500 -112 -20 100 -32
4600 -12 -20 100 68
4700 88 -20 -100 -32
4800 188 80 -300 -32
4900 288 180 -500 -32

In the above payoff table we can see that maximum profit for a long butterfly strategy occurs when the expiry price is closest to the Strike price of the ATM call option i.e 4600.

This proves that butterfly strategy is profitable only when the markets do not move up or down but manage to trade sideways and most importantly close at levels near to the ATM call options strike price. - See more at: http://www.dsij.in/article-details/articleid/3315/what-is-the-long-butterfly-strategy.aspx#sthash.fXAAJopv.dpuf