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Butterfly Spread Using CALL

1. The document discusses butterfly spread strategies using calls and puts, which involve taking long and short positions on options with different strike prices to profit from low volatility. 2. It notes that butterfly spreads have limited profit potential and are generally not suitable for retail investors due to high costs of shorting, but can be profitable for financial institutions. 3. The document then discusses calculating mean reversion values for 3 stocks using candlestick charts to determine bullish or bearish option positions based on the current price relative to the mean value. Positions included call heavy, put heavy, or balanced based on the analysis.

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Ashutosh Biswal
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46 views

Butterfly Spread Using CALL

1. The document discusses butterfly spread strategies using calls and puts, which involve taking long and short positions on options with different strike prices to profit from low volatility. 2. It notes that butterfly spreads have limited profit potential and are generally not suitable for retail investors due to high costs of shorting, but can be profitable for financial institutions. 3. The document then discusses calculating mean reversion values for 3 stocks using candlestick charts to determine bullish or bearish option positions based on the current price relative to the mean value. Positions included call heavy, put heavy, or balanced based on the analysis.

Uploaded by

Ashutosh Biswal
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1)(A)

Butterfly Spread
 Butterfly spread is a combination of Bull spread and Bear spread.
 It is a neutral option strategy where there is an expectation of low volatility of
underlying security.
 The risk and profit potential is limited in Butterfly spread. It is a three-leg strategy , that
means three different strike prices are involved.
Butterfly spread option strategies can be implemented using both CALL and PUT

Butterfly spread using CALL


 Three different strike prices are involved in butterfly spread using CALL.
It means Long a CALL at higher strike price , Long another CALL at with lower strike
price and Short 2 CALL at intermediary strike price. In other way we can say that Long
one CALL In The Money, Short 2 CALL At The Money and Long one CALL Out of The
Money .

Here K1, K2, K3 are the strike prices for Butterfly spread using CALL.

Butterfly Spread using PUT


Butterfly spread using PUT involves Long PUT with higher strike price, Long another PUT
with lower strike price and short 2 PUTS at the intermediary prices. In other way we can say
that Long one PUT OTM, Long one PUT ITM and short 2 PUT ATM.
Here K1, K2, K3 are the strike prices for Butterfly spread using PUT.
We can categorise the investors as Retail investor and Institutional investor.
Whether it is a butterfly spread using PUT or CALL it involves shorting of either the CALL or
PUT option. Shorting demands high upfront fees to be paid. Retail investors are mostly less
risk taking in nature. They usually invest in mutual funds and all. Butterfly spread is usually
not preferable for individual world. The cost of shorting is prohibitively high. So even if a
somebody earns through buying call option, the Shorting cost will wipe out the profit. The
pay off of the butterfly spread is relatively low and it is limited also. It is not quite popular
for retail investors mostly because of high cost of shorting , incredibly high commission and
there is very limited profit.
Butterfly spread is mostly common in Currency as underlying security.
But for financial institutions it is profitable as these institutions already have a series of
positions for shorting. Shorting mechanism is quite natural to financial institutions. They
don’t have to pay the hefty fee for shorting like retail investors.
1)(B)

 Calendar spread is basically meant that it is the buying and shorting a particular type of
Option ( it could be CALL or PUT) for a specific underlying security at same strike prices
but at a different expiry date.
 Calendar spread can be performed using either PUT or a CALL.
 It is also known as horizontal spread. It is either bullish or bearish. The trader expects a
sideways movement in the market.
 Shorting an Option whether it is CALL or PUT, a high cost is incurred for retail investor.
Because it has to be borrowed and the cost of borrowing is pretty high. The commission
and other charges involved in shorting is incredibly high. Because of the high upfront fee
it is not preferred amount retail investors/
 Financial institution aims at getting the profit from the movement of USD INR.
 Global financial institutions are in profitable position here, because they inherently have
shorting positions and it does not incur hefty charges like the retail investors.

Calendar Spread Payoff Diagram

2) I have calculated the mean reversion value for 3 underlying stocks.


1. Biocon
2. TCS
3. Bharti Airtel
I kept an eye on following things for calculating mean reversion and taking position.

 Before calculating mean reversion, I checked for salad formation or not. While
calculating the mean reversion value for the 3 underlying stocks there were no salad
formations happening.
 Then I went ahead to calculate mean reversion value. For this I used the platform
Zerodha using candle stick pattern.

The below mentioned points were taken into consideration while calculating mean
reversion value of an underlier
 First I checked if there is no salad formation for the underlier.
 I took 30 minutes interval data in the candle stick view. Then I draw different lines to
cross the maximum number of candle stick. I chose the candle stick with maximum
mode value. I emphasized the fact that the minimum mode should be greater than equal
to 15.
 Then I extend the line so that it will cut the right hand side Y axis.
 The point it cut the right hand side Y axis it was the mean reversion value.
 I compared the mean reversion value with the current underlier price in the market and
I took the position accordingly
 If the mean reversion value was greater than the live price of the underlier I took CALL
heavy position. It means 2 CALL and 1 PUT
 If the mean reversion value was smaller than the live price of the underlier I took PUT
heavy position. It means 2 PUT and 1 CALL
 If the mean reversion value was near equal to the live price of the underlier 1 CALL and 1
PUT position
BIOCON

Mode -18
Mean reversion value- 425.22
Date and time- 21st July 1.50 pm
Live underlier price- 425.19
Position taken - 1 CALL and 1 PUT
Chosen strike price- 425
Bharti Airtel

Mode- 19
Mean reversion value- 568.05
Date and Time- 22nd July 10.45 am
Live underlier price – 572
Position taken- PUT heavy
Chosen strike price - 570
TCS

Mode- 19
Mean reversion value- 2166.24
Date and Time- 23rd July 2.15 pm
Live underlier price – 2171.42
Position taken – PUT heavy
Chosen strike price - 2180
Before taking position the below mentioned points were taken into consideration

 For the chosen strike price I checked the Implied volatility part . For a PUT heavy position
IV of PUT should be higher than IV of call
 I checked if the difference in % value of Net change is significance or not
 I checked the OI part. For a CALL heavy or PUT heavy position checked the market
sentiment from OI.

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