📚 Table of Contents
- 📌 What is a Long Call Butterfly?
- 🧠 How Does It Work?
- 🆚 What is a Short Strangle Strategy?
- 📊 Payoff Graph of Long Call Butterfly
- 📍 Real-World Live Examples
- 🚪 How to Exit the Long Call Butterfly
- ✅ Pros and ❌ Cons of Long Call Butterfly
- 🧠 Final Thoughts
- ❓ Frequently Asked Questions (FAQs)
Options trading offers a wide range of strategies tailored to different market conditions. One such neutral strategy designed to profit from low volatility is the Long Call Butterfly. In this blog, we explain this strategy in simple terms, with real-life examples from Bank Nifty, Nifty 50, and a stock like Reliance. We also cover the Short Strangle comparison, exit strategy, payoff graph, pros & cons, and FAQs.
📌 What is a Long Call Butterfly?
The Long Call Butterfly is a limited-risk, limited-reward options strategy used when a trader expects very little movement in the underlying asset by expiry. It involves three strike prices and four call options:
- Buy 1 ITM Call (Lower Strike)
- Sell 2 ATM Calls (Middle Strike)
- Buy 1 OTM Call (Higher Strike)
All contracts must:
- Have the same expiry
- Belong to the same underlying
🧠 How Does It Work?
| Strike | Action | Type | Premium |
|---|---|---|---|
| Lower | Buy 1 | Call (ITM) | - |
| Middle | Sell 2 | Call (ATM) | + |
| Higher | Buy 1 | Call (OTM) | - |
🔄 Net Cost: Small debit (premium paid)
💸 Max Profit: When spot = middle strike
💥 Max Loss: Total net premium paid
🆚 What is a Short Strangle Strategy?
The Short Strangle is a neutral options strategy where:
- Sell 1 OTM Call + Sell 1 OTM Put
- Profits from time decay and a range-bound market
- Risk is unlimited if the market moves beyond break-even
Long Call Butterfly vs Short Strangle:
- Butterfly: Limited risk/reward, lower margin
- Strangle: Unlimited risk, higher reward, higher margin
📊 Payoff Graph of Long Call Butterfly
/\
/ \
/ \
--------/ \---------
BE1 BE2
- Max Profit at middle strike
- Breakeven = Lower + Net Premium, Higher - Net Premium
- Loss capped to premium paid
📍 Real-World Live Examples (08 Aug 2025)
🔹 Example 1: BANKNIFTY
- Spot: ₹48,000
- Buy 47,700 CE @ ₹400
- Sell 48,000 CE x2 @ ₹230
- Buy 48,300 CE @ ₹100
🧮 Net Premium = ₹40 (debit) Max Profit = ₹260 Max Loss = ₹40 Breakeven: 47,740 & 48,260
Scenario 1:
If BANKNIFTY closes at 48,000 → Max Profit ₹260
Scenario 2:
If BANKNIFTY closes at 47,900 or 48,100 → Partial profit
Scenario 3:
If BANKNIFTY closes below 47,740 or above 48,260 → Max Loss ₹40
Here is the colorful payoff graph for the 🦋 Long Call Butterfly Strategy using the BANKNIFTY example (dated 08 Aug 2025):
📍 Green Line – Middle Strike (Max Profit @ ₹48,000)
📍 Red Line – Lower Strike (₹47,700)
📍 Blue Line – Higher Strike (₹48,300)
📉 X-axis: BANKNIFTY Spot at Expiry
💰 Y-axis: Net Profit / Loss (₹)
🔹 Example 2: NIFTY
- Spot: ₹23,450
- Buy 23,300 CE @ ₹220
- Sell 23,450 CE x2 @ ₹120
- Buy 23,600 CE @ ₹50
🧮 Net Premium = ₹30 Max Profit = ₹120 Max Loss = ₹30 Breakeven: 23,330 & 23,570
🔹 Example 3: RELIANCE
- Spot: ₹3,000
- Buy 2,950 CE @ ₹100
- Sell 3,000 CE x2 @ ₹60
- Buy 3,050 CE @ ₹30
🧮 Net Premium = ₹10 Max Profit = ₹40 Max Loss = ₹10 Breakeven: 2,960 & 3,040
🚪 How to Exit the Long Call Butterfly
- Before Expiry: Exit manually, use basket order
- At Expiry: Auto-settled
- Stop-Loss: Exit early if spot crosses breakevens
✅ Pros and ❌ Cons of Long Call Butterfly
| Pros ✅ | Cons ❌ |
|---|---|
| Low Cost Strategy | Limited Profit |
| Ideal in Low Volatility | Not suitable for big moves |
| Defined Risk & Reward | Precision required in view |
| No Margin for Buying Legs | Multi-leg complexity |
🧠 Final Thoughts
The Long Call Butterfly strategy is perfect when you expect the market to remain in a tight range. It gives you peace of mind through limited risk and known returns. Try it with high liquidity assets like NIFTY, BANKNIFTY, or stocks like RELIANCE and HDFC during low VIX conditions.
❓ Frequently Asked Questions (FAQs)
🔹 Q1. What is the maximum profit in a Long Call Butterfly?
A: When the underlying closes exactly at the middle strike. Profit = Difference between strikes - Net premium.
🔹 Q2. Is the Long Call Butterfly a safe strategy?
A: Yes, it’s low-risk. Both reward and loss are capped.
🔹 Q3. When should I use a Long Call Butterfly?
A: When you expect a sideways market, low volatility, or post major news events.
🔹 Q4. What are the breakeven points?
A: Lower Breakeven = Lower Strike + Net Premium, Higher Breakeven = Higher Strike – Net Premium
🔹 Q5. Can I use this strategy on Bank Nifty or Nifty?
A: Yes, works well with liquid index options.
🔹 Q6. What happens if the market moves a lot?
A: You lose the premium paid. That’s the max loss.
🔹 Q7. Difference between a Long Call Butterfly and a Short Strangle?
| Feature | Long Call Butterfly | Short Strangle |
|---|---|---|
| Risk | Limited | Unlimited |
| Reward | Limited | Limited |
| Market View | Neutral/Low Volatility | Range-bound |
| Margin | Low | High |
🔹 Q8. Can I automate this strategy with broker APIs?
A: Yes. Brokers like Angel One, Zerodha, and Upstox provide APIs for automation.
🔹 Q9. Do I need to square off manually?
A: You can square off manually, use a trailing stop-loss, or let it expire.
🔹 Q10. Is this strategy beginner-friendly?
A: Yes, if you're comfortable with multi-leg orders and understand options basics.
