How to trade in sideways market? Options Trading (Butterfly Spread)

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Butterfly spread !

Market Looks Like Sideways ? Want to trade but with proper risk management.


Before an application of butterfly spread you must have a market view as non-volatile. Yes my friend it only works in non-volatile markets.
 
How to apply practically in the market.?? Which Strike price is required to select ?

Let's understand,
Many times we see different-different opinions in news channels and on social media that the market will be bullish from there or the market will be bearish from there but if you have understood the market behaviour you will be able to draw your own opinion. And if your opinion is sideways than you are the perfect one who can get benefit from this strategy.

For Example:

Company A
CMP: 2700

Formation:
Buy - Cash Outflow
Sell - Cash Inflow

Major condition : Choose strike price only on the basis of uniformity i.e difference between each strike price should be equal in this case i have taken the difference of 300. You can take 100, 200, or 300 as as per the premium available where you can minimise your risk.

Lowe strike price must be less than CMP and higher strike price must be greater than CMP.

    Strike Price  Premium
Buy Call  Low Strike price 2600 137.55
Sell Calls ( 2) Medium Strike Price 2700 79.1
Buy Call High Strike Price 2800 41.35

In this case your maximum loss will be your initial outflow of premium if you were wrong and market becomes volatile i.e. -CE Low - CE High +PE Medium = -20.7 ( -137.55-41.35+2*79.1 ) 
And maximum profit = 161.15 
Which will be at the point where stock market price will move to medium strike price i.e 2800 in this example.

Now let's look at what will happen in case of each option separately which I had bought and sold above.at maximum profit level i.e 2700

1) Bought Call low strike price. Max profit -
Max ( Buy call premium, Expected stock market price-Lower strike price - premium paid )
Max ( -137.55, 2700-2600-137.55)
= -37.55

2) Sold Call Medium strike price. Max profit -
Max ( sell call premium, Expected stock market price-Medium strike price - premium paid )
Max ( 79.1*2, 2800-2800+79.1*2*2)
= +158.2

3) Bought Call high strike price. Max profit -
Max ( Buy call premium, Expected stock market price-Higher strike price - premium paid )
Max ( -41.35, 2700-2800-41.35)
= -41.35

See how your Pay-Off will look like.


 
You can freely access the financial model template for Butterfly Strategy with the help of this downloadable link.


For more information on how to use the model please watch the attached video.



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