Difference between short call butterfly and short condor

Almost every investor in the Indian financial market is different in the way they use investing strategies. Some invest for the short term; some are value investors, while others are intraday traders. Apart from the time horizon, investors leverage numerous other factors to differentiate them from others where they try to make as much profit as possible. However, one thing that is common among every investor or trader is their cautious approach towards diversification.

Options Trading is one of the most effective ways through which investors ensure diversification. Options are contracts that grant the holder the right but do not bind them, to either buy or sell a sum of some underlying asset at or before the contract expires at a fixed price. Options can be acquired with brokers through online trading accounts as with any other asset group. However, Options Trading includes hundreds of strategies and depends on the market trend for execution. Two such strategies that are widely used but confuse traders on which one to use are Short Call Butterfly and Short Condor.

This blog is all about short call butterfly vs short call condor, where you will understand both the strategies and how you can use them in different market situations. But, before diving deep into it, you should learn about some common terms related to the strategies.

Some terms associated with short call butterfly vs short call condor

• Call Options: A Call Option is a contract wherein you win the right, but not the obligation, to buy a certain underlying asset at a decided upon price and date between the contracting parties.

• Put Options: A Put Option works exactly opposite to the call option. While the call option equips you with the right to buy, the put option empowers you with the right to sell the stock at the price on the date agreed upon by the contracting parties.

• Strike Price: The price at which the options contract was initially bought or the pre-determined price.

• Spot Price: The current price of the underlying asset is attached with the options contract.

• Premium: It is the price you pay to the seller of the option for entering into the online trading options.

• In-The-Money (ITM) option: When the underlying asset price is higher than the strike price.

• Out-of-the-money (OTM) option: When the underlying asset price is lower than the strike price.

Short call butterfly vs Short call condor: Definition

Short Call Butterfly: Short call butterfly is a four-legged options trading strategy that involves buying two ATM (at-the-money) calls at a middle strike price and simultaneously selling 1 ITM (in-the-money) call at a lower strike price and one more OTM (out-of-the-money) call at a higher strike price. The lower and higher strike price call options are equidistant with the two middle strike price calls.

All four options have the same underlying asset and the same expiration date. The short call butterfly is entirely the opposite of the long call butterfly options trading strategy and uses a bullish and bearish spread to manage and mitigate the investor’s risk exposure.

Short Call Condor: A short call condor options trading strategy combines a Bull Call Spread and Bear Call Spread and makes up for a new options trading strategy. In a short call condor, an investor sells one lower ITM Call, buys one lower-middle ITM Call, buys one higher-middle OTM Call and sells one higher OTM Call. The underlying asset and the expiry date is the same for all the calls.

A short call condor has similar features to a Short Butterfly Strategy. The short call condor strategy has a limited risk exposure along with offering limited profits to the investors. The maximum loss in this strategy is limited to the price difference between the two middle strike price call options, minus the net premium collected initially.

Short call butterfly vs Short call condor: When and how to use Short Call Butterfly and Short Condor

Short Call Butterfly: The ideal time for executing the short call butterfly is when investors expect the market to be highly volatile. In this case, the investors can benefit the most from the price movement and ensure they are protected against market risk. The strategy aims to provide profits if the price movement goes above the strike price of the call option that has a higher strike price (OTM) or less than the strike price of the call option that is ITM (In-the-money). Overall, if the price movement is considerable, irrespective of the direction, the investor will make profits.

Short Call Condor: A short call condor is implemented by investors when they believe that the price movement may go outside the range of the highest and the lowest strike price of the contract’s underlying asset. If the current volatility in the market is low and the investors think it can go up in the future, they can implement the short call condor options trading strategy. However, if the price remains intact and remains within the range of the two middle strike price call options, you will incur a loss.

Advantages of Short Call Butterfly and Short Condor

Short Call Butterfly: This strategy can be used by investors who do not want to invest their capital as it requires no initial capital investment. As the investors receive a net credit of premium after the first transaction, they can use that amount to execute the short call butterfly strategy. Furthermore, it allows investors to ensure they are profitable even when the market is highly volatile, and that too, with very low-risk exposure. The investors stand to make profits using the short call butterfly strategy regardless of the price movement direction.

Short Call Condor: The strategy has a comparatively wider profit potential even when it offers lower profits related to other options strategies. As you have a credit of net premium, you don’t require any capital to implement a short call condor options trading strategy. As it is a neutral strategy, it also allows investors to make profits in a highly volatile market without considering the direction of the price movement. Furthermore, a short call condor is technically easier to create and execute when compared to short call butterfly and other options trading strategies.

Now that you have read everything about short call butterfly vs short call condor, you can analyse both the strategies on the above-mentioned factors and choose the one you think can give you better profits. Both of them do not require any initial capital and come with considerable low risk.

If you think that the current market is highly volatile, you can look to execute short call butterfly or short call condor. Depending on your positions, you can even execute both strategies for diversification and further mitigate the chances of losses. If you have any doubts regarding the strategies, you can consult the financial advisors at IIFL.