Short Call Butterfly and Short Condor are two widely used Options Trading strategies. Although these strategies are similar, there are some differences that might confuse traders. In this article, let’s understand Short Butterfly and Short Call Condor strategies and their differences.
But before that, let’s understand some basic terms related to Options Trading.
Terms associated with Short Call Butterfly and Short Condor
- Call option: A contract where you have the right but not the obligation to buy the underlying asset at a pre-decided price and date agreed by the contracting parties.
- Put option: A contract where you have the right to sell the underlying asset at a pre-decided price and date agreed upon by the parties involved.
- Strike price: The predetermined price or the price at which the Options Contract was initially bought.
- Spot price: The current price of the underlying asset.
- Premium: The price you pay to the Options Contract seller to enter the online trading options.
- In-the-money (ITM) option: When the price of the underlying asset is higher than the strike price.
- Out-of-the-money (OTM) option: When the price of the underlying asset is lower than the strike price.
What is a Short Call Butterfly?
Short Call Butterfly is a four-legged Options Trading strategy. It involves the following transactions, which are done simultaneously:
- Buying two at-the-money (ATM) calls at a middle strike price
- Selling one ITM (in-the-money) call at a lower strike price
- Selling one OTM (out-of-the-money) call at a higher strike price
- The lower and higher strike price call options are equidistant from the middle strike price calls.
- All four Options have the same underlying asset and expiration date
- The Short Call Butterfly uses a bullish and bearish spread to manage/mitigate traders’ risk exposure.
Read more about Options Trading Strategy with Short Call Butterfly
Advantages of Short Call Butterfly
The Short Call Butterfly Options Trading strategy doesn’t require initial capital. So traders who don’t wish or have the initial capital investment may find this suitable. Traders can use the net credit of the premium after the first transaction to execute the Short Call Butterfly strategy.
Traders can enjoy low-risk profits even when the market is highly volatile. Profits can be earned using this strategy irrespective of the direction of the price movement.
When to Use a Short Call Butterfly?
The ideal time for using the Short Call Butterfly strategy is when the market is expected to be highly volatile, as traders can benefit the most from the price movement. The strategy helps earn profits if:
- The price exceeds the strike price of the call option with a higher strike price (OTM)
- The price falls below the strike price of the ITM Call Option
What is a Short Call Condor?
Short Call Condor options trading strategy is a combination of a Bull Call Spread and a Bear Call Spread. In this case, the trader:
- Sells a lower ITM Call
- Buys a lower-middle ITM Call
- Buys a higher-middle OTM Call
- Sells a higher OTM Call
Note: All the above Options have the same underlying asset and the expiry date.
The Short Call Condor has limited risk exposure. It offers limited profits to traders. The maximum loss is limited to the price difference between the two middle strike price call options less the initial net premium collected.
Advantages of the Short Call Condor
In case of the Short Call Condor Options Trading strategy also, you don’t need an initial investment as you will have received a credit of net premium. Traders can earn profits in a highly volatile market regardless of the price movement direction. Besides, creating and executing this strategy is technically easier than Short Call Butterfly and other Options Trading strategies.
When to Use a Short Call Condor?
Traders can use the Short Call Condor strategy when the price movement surpasses the range of the underlying asset's highest and lowest strike price. Simply put, this strategy can be profitable if the prevailing market volatility is low and traders expect it to intensify. But you'll incur a loss if the price remains within the said range.
Short Butterfly Strategy vs Short Call Condor in a Table
The Short Butterfly Option strategy shares similar features to the Short Call Condor strategy. However, they have certain differences, as put in the table below.
|Short Call Butterfly
|Short Call Condor
|When to use?
|When you foresee high volatility in the market
|When you expect the underlying asset's price to be highly volatile during the lifetime of the Options.
|Break Even point
There are two break-even points:
There are two break-even points in this strategy:
|Maximum risk = Higher strike price - Lower strike price - Net premium
|Maximum risk (loss) = Strike price of lower strike long call - Strike price of lower strike short call - Net premium received + Commissions paid
|The profit is limited to the net premium received
|Maximum profit = Strike price of lower strike short call - Strike price of lower strike long call - Net premium paid
|Maximum loss scenario
|Only ITM Call is exercised
|Both ITM Calls are exercised
|No investment required due to the receipt of credit of net premiums
|Little to no investment due to the receipt of credit of net premiums