Short Call Butterfly is a strategy that must be devised when the investor is neutral on the market direction and expects volatility to be significant in the market.
A Short Call Butterfly strategy is formed by buying two “At-the-Money Call” Options, selling one “Out-of-the-Money Call” Option and one “In-the-Money” Call Option.
Compared to Straddle and strangle, this strategy offers very small returns. The risk involved is slightly less as compared to them.
The investor will benefit if the underlying Stock/ Index finishes on either side of the upper and lower strike prices at expiration.
Investor view: Neutral on direction and bullish on Stock/ Index volatility.
Risk: Limited to difference between adjacent Strikes – net premium received.
Reward: Limited to the premium received.
Lower breakeven: Strike price of higher Strike Short Call + net premium received.Higher breakeven: Strike price of Lower Strike Short Call – net premium received