Compare Trading Platform Covered Call and Short Call Butterfly. Find similarities and differences between Covered Call and Short Call Butterfly Trading Softwares. Find the most powerful trading platform. Find which trading software is better among Covered Call and Short Call Butterfly.
| Covered Call | Short Call Butterfly | |
|---|---|---|
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| About Strategy | A Covered Call is a basic option trading strategy frequently used by traders to protect their huge share holdings. It is a strategy in which you own shares of a company and Sell OTM Call Option of the company in similar proportion. The Call Option would not get exercised unless the stock price increases. Till then you will earn the Premium. This a unlimited risk and limited reward strategy.
Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income. Read More | Short Call Butterfly (or Short Butterfly) is a neutral strategy similar to Long Butterfly but bullish on the volatility. This strategy is a limited risk and limited profit strategy.
This strategy consists of two long calls at a middle strike (or ATM) and one short call each at a lower and upper strike. All the options must have the same expiration date. Also, the upper and lower strikes (or wings) must both be equidistant from the middle strike (or body).
In simple terms, it involves Sell 1 ITM Call, Buy 2 ATM Calls and Sell 1 OTM Call. The strike prices of all Options should be at equal distance from the current price as shown in the example below.
The usual Short Butterfly strategy looks like as below for NIFTY current index value as 1 Read More |
| Market View | Bullish | Neutral |
| Strategy Level | Advance | Advance |
| Options Type | Call + Underlying | Call |
| Number of Positions | 2 | 4 |
| Risk Profile | Unlimited | Limited |
| Reward Profile | Limited | Limited |
| Breakeven Point | Purchase Price of Underlying- Premium Recieved | 2 Break-even Points |
| Covered Call | Short Call Butterfly | |
|---|---|---|
| When to use? | The covered call option strategy works well when you have a mildly Bullish market view and you expect the price of your holdings to moderately rise in future. | This strategy is meant for special scenarios where you foresee a lot of volatility in the market due to election results, budget, policy change, annual result announcements etc. |
| Market View | Bullish When you are expecting a moderate rise in the price of the underlying or less volatility. | Neutral When you are unsure about the direction in the movement in the price of the underlying but are expecting high volatility in it in the near future. |
| Action |
Let's assume you own TCS Shares and your view is that its price will rise in the near future. You will Sell OTM Call Option of TCS at a price, where you target to sell your shares. You will receive premium amount for selling the Call option and the premium is your income. |
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| Breakeven Point | Purchase Price of Underlying- Premium Recieved | 2 Break-even Points There are 2 break even points in this strategy.
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| Covered Call | Short Call Butterfly | |
|---|---|---|
| Risks | Unlimited Maximum loss is unlimited and depends on by how much the price of the underlying falls. Loss happens when price of underlying goes below the purchase price of underlying. Loss = (Purchase Price of Underlying - Price of Underlying) + Premium Received | Limited The maximum risk is limited. Maximum Risk = Higher strike price- Lower Strike Price - Net Premium |
| Rewards | Limited You earn premium for selling a call. Maximum profit happens when purchase price of underlying moves above the strike price of Call Option. Max Profit= [Call Strike Price - Stock Price Paid] + Premium Received | Limited The profit is limited to the net premium received. This happens when the price of the underlying is trading beyond the range of strike prices at expiration date. |
| Maximum Profit Scenario | Underlying rises to the level of the higher strike or above. | All Options exercised or not exercised |
| Maximum Loss Scenario | Underlying below the premium received | Only ITM Call exercised |
| Covered Call | Short Call Butterfly | |
|---|---|---|
| Advantages | It helps you generate income from your holdings. Also allows you to benefit from 3 movements of your stocks: rise, sidewise and marginal fall. | This strategy requires no investment as net premium is positive and received. It allows you to benefit from high volatile market scenarios without the need to speculate on the direction of price movement. |
| Disadvantage | Unlimited risk for limited reward. | Profitability depends on significant movement in the price of the underlying. |
| Simillar Strategies | Bull Call Spread | Long Straddle, Long Call Butterfly |
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