1

Middle strike can be ATM, OTM or ITM

The spread of lower & upper strike is the wing of butterfly

It’s a Debit Trade (Net Premium Paid)

The idea is to
gain from range bound move & capture time decay (theta)
 3

Butterfly Strategy
It’s a closed strategy with defined risk & reward.

Risk & reward payoff on expiry can be quantified

M2M profit loss happens with market moves
 4
Butterfly Strategies

❑ Long Call or Put butterfly

❑ Short Call or Put butterfly
❑ Broken wing Call or Put butterfly
❑ Directional butterfly
❑ Iron butterfly
❑ Hedging – Defence using butterfly
 5
Directional Butterfly

Middle strike as ATM (Call or Put) Market neutral

Middle strike as OTM Call or ITM Put Bullish view

Middle strike as ITM Call or OTM Put Bearish view

6
 7

Our Modified Butterfly System is a

combination of 2 butterfly structures

Thus a combination of
Normal Call butterfly, and
Reverse (or inverted) Call butterfly

Long Call butterfly & Short Call butterfly

 8

Structure
Normal Butterfly
Selling middle (base) strike 2 lots & buying lower & upper strikes 1 lot each
(Debit Trade)

Reverse Butterfly
Buying middle (base) strike 2 lots & selling other lower & upper strikes 1 lot
each
(Credit Trade)
Thus, overall it’s a net debit trade
Eliminating middle strike,
it’s a 4 Leg System
 9

Which strikes are selected for each of the 4 legs ?

We will see shortly with an example.

For strike selection,

We need to understand the term “base strike”
 10

What is a Base Strike

It’s a middle common strike referred in normal & reverse structure

Base Strike
Is always a nearest multiple of 100 to Nifty future price
(not nearest multiple of 50)

For example,
If Nifty future is 13660, base strike is 13700
If Nifty future is 13640, base strike is 13600
 11
Strike Price Rule
Normal Butterfly
Selling base strike 2 lots &
Buying 200 lower & 200 upper strikes 1 lot each
(Debit Trade)

Reverse Butterfly
Buying base strike 2 lots &
Selling 100 lower & 100 upper strikes 1 lot each
(Credit Trade)
Thus, overall it’s a net debit trade
Eliminating common base strike,
it’s a 4 Leg System
 12

Now let’s see an example of

Entry Trade Structure
 Nifty Future 11673 on 02-Nov 13
Base strike 11700 Nearest multiple of 100
Example of Normal (Trade A)
Entry Trade In/Out
Base
Expiry
CE 11700 05-Nov Sell
Price
119.30 x
Structure 200 CE 11500 05-Nov Buy 240.00
200 CE 11900 05-Nov Buy 46.00
Debit (paid) 166.70 This can also be viewed
Trade No. 1.3 of Nov as Bull Call Spread,
Reverse (Trade B) &Bear Call Spread
In/Out Expiry Price
Base CE 11700 05-Nov Buy 119.30 x
100 CE 11600 05-Nov Sell 175.00
100 CE 11800 05-Nov Sell 76.00
Credit (Recd) -131.70 Our Option
management is based
Combined Net Debit (paid) 35.00 on Butterfly structure

Trade A is 200 distance from base strike

Trade B is 100 distance from base strike
Eliminating common base strike, it's a 4 leg structure
 14
Entry & Exit Rule
Enter the trade on Thursday (Day 0) closing time (say, 3 pm to 3:25 pm).

Final exit on Wednesday closing (1 day prior to expiry)

However,
As a part of adjustment process, always exit next day closing time, and
Take a new entry with relevant strikes

The idea is
Never leave profit on the table
 15

Entry & Interim Exit

Entry on Thursday (Day 0), Friday (Day 1), Monday (Day 2), Tuesday (Day 3)
No entry trade on Wednesday

Exit (we say interim exit) next day closing

Thus, 4 trades in a week

 16
Trade Flow
Interim Interim Interim Final
Exit Exit Exit Exit

Entry Entry Entry Entry No Entry

Day 0 Day 1 Day 2 Day 3 Day 4

Thu Fri Mon Tue Wed

Interim days Exit, Entry are swich out & swich in of strikes; part of adjustment process. The
trade closes on a daily basis; the strategy closes on Wednesday.
The objective is “take profit home” and move forward with new strikes
 17
Risk, Reward (Payoff) calculation
Risk (Max Loss) = Net debit paid
Reward (Max profit) = Difference in adjacent strike – net debit
BE Down (Loss crossing below) = Lowest strike + net debit
BE Up (Loss crossing above) = Highest strike – net debit
Profit Range = Between 2 Break-even
Max Profit Range = Between 2 sold strikes
 Example of Entry Trade Risk (Drawdown) 35.00 18
Reward (Potential) 65.00
Nifty Future 11673 on 02-Nov
Base strike 11700 Nearest multiple of 100 Risk
BE Dn (Loss crossing below) 11535
BEUp (Loss crossing above) 11865 Reward
Normal (Trade A) Info
In/Out Expiry Price
Base CE 11700 05-Nov Sell 119.30 Profit Range 11535 to 11865
200 CE 11500 05-Nov Buy 240.00 Comfort from entry price -138 & +192
200 CE 11900 05-Nov Buy 46.00
Debit (paid) 166.70 Max Profit Range 11600 to 11800

80 Payoff Graph
Reverse (Trade B) 65 65 65
In/Out Expiry Price 60
Base CE 11700 05-Nov Buy 119.30
40

-Loss / Profit
100 CE 11600 05-Nov Sell 175.00
100 CE 11800 05-Nov Sell 76.00 20

Credit (Recd) -131.70 0 0

0
11,085 11,385 11,535 11,604 11,673 11,769 11,865 12,015 12,315
Combined Net Debit (paid) 35.00 -20
-35 -35 -35 -35
-40

Trade No. 1.3 of Nov

 19

Adjustment Process
Option Management

In case of a loss at the time of interim exit on next day

 Adjustment (Reference) Trade (in case of loss) 20
2 Actions
Continue current butterfly trade (carry forward) for next day
&
Sell Call or Put with protection as the case may be
(That is, Bear Call spread or Bull Put spread)

Criteria for selling Call or Put

If Nifty future has dropped,
Sell Call of base strike as of previous day (day of entry)
with buy Call (protection) of 300 OTM from base strike
If Nifty future has gone up,
Sell Put of base strike as of previous day (day of entry)
with buy Put (protection) of 300 OTM from base strike
 21

How Stop Loss criteria will work

 22
Stop Loss Criteria
For entry trade
25% of net debit (risk amount), which is entry price
If M2M loss at any time is about to cross 25% of net debit,
exit the trade & book the loss

This. Stop loss exit price is 75% of entry price

 23
Stop Loss Criteria
For entry trade
25% of net debit (risk amount), which is entry price
If M2M loss at any time is about to cross 25% of net debit,
exit the trade & book the loss

This. Stop loss exit price is 75% of entry price

Then re-enter same strikes entry at the closing time

 24
Stop Loss Criteria
For adjustment (reference) trade
There are 2 action trades
Butterfly re-entered trade &
Bear Call or Bull Put trade

Stop Loss for butterfly re-entered trade

Initial SL of 25% of net debit plus M2M loss or loss booked for initial trade
Stop Loss for bear call or bull put trade
SL at 50% of credit (entry price)
 25

No adjustment (or Reference ) Trade

When final exit is on Wednesday

(No exposure on volatile expiry day)

 26
Our Butterfly system trade is always a net debit price trade

Profit / Loss Calculation

If net debit price increases, it’s a profit
If net debit price drops, it’s a loss

Debit price is paid at entry

You receive more at exit, it’s a profit
You receive less at exit, it’s a loss
 27
Our Butterfly system trade is always a net debit price trade

Profit / Loss Calculation

If net debit price increases, it’s a profit
If net debit price drops, it’s a loss

Thus, a stop loss price is lower than the entry price

If desired SL points is 25% of net debit,

Then SL exit price is 75% of entry price
 28
Our Reference trade of Bear Call or Bull Put
is always a net credit price trade
Profit / Loss Calculation
If net credit price drops, it’s a profit
If net credit price increases, it’s a loss

Credit price is received at entry

You pay less at exit, it’s a profit
You more less at exit, it’s a loss
 29
Our Reference trade of Bear Call or Bull Put
is always a net credit price trade
Profit / Loss Calculation
If net credit price drops, it’s a profit
If net credit price increases, it’s a loss

Thus, a stop loss price is higher than the entry price

If desired SL points is 50% of net credit,

Then SL exit price is 50% of entry price
 Nifty 11673 on 02-Nov 30
Example of Base strike 11700 Nearest multiple of 100 YTD Fut Move 235
11673 11823 150 11908 85
Adjustment Normal (Trade A) 02-Nov 03-Nov 04-Nov

(Reference) CE 11500
Expiry
05-Nov Buy
Price
240.00
Price
357.25
P/-L
117.25
Price YTD P/-L
403.00 163.00
Trade CE 11900 05-Nov Buy 46.00 89.90 43.90 72.00 26.00
Debit (paid) 286.00 447.15 161.15 475.00 189.00

M2M Loss Reverse (Trade B)

Scenario Expiry Price Price Price
CE 11600 05-Nov Sell 175.00 277.25 -102.25 310.75 -135.75
CE 11800 05-Nov Sell 76.00 139.90 -63.90 135.00 -59.00
Profit Range
Credit (Recd) -251.00 -417.15 -166.15 -445.75 -194.75
11535 to 11865
Combined Net Debit (paid) 35.00 30.00 -5.00 29.25 -5.75
Comfort Zone Stop Loss exit price @ 75% 26.25 21.25 M2M C/F
-138 to +192 SL Points @ 25% 8.75 13.75
SL not Hit SL not Hit
PE 11700 03-Nov Sell 84.60 22.25 62.35
PE 11400 03-Nov Buy 27.00 5.00 -22.00
Ref Trade Net credit (Received) 57.60 17.25 40.35
Trade No. 1.3 of Nov Stop Loss exit price @ 150% 86.40 SL not Hit
SL Points @ 50% 28.80 Total P/-L 34.60
 Nifty 12941 on 23-Nov
31
Example of Base strike 12900 Nearest multiple of 100
12941 13078 137
YTD Fut Move
12857
-84
-221
Adjustment Normal (Trade A) 23-Nov 24-Nov 25-Nov
Expiry Price Price P/-L Price Day P/-L
(Reference) CE 12700 26-Nov Buy 266.90 387.00 120.10 175.00 -212.00

Trade CE 13100 26-Nov Buy

Debit (paid)
25.70
292.60
64.00
451.00
38.30
158.40
6.10 -57.90
181.10 -269.90

SL Hit Reverse (Trade B)

Scenario CE 12800
Expiry
26-Nov Sell
Price
182.45
Price
292.65 -110.20
Price
97.00 195.65
CE 13000 26-Nov Sell 58.50 123.05 -64.55 15.00 108.05
Credit (Recd) -240.95 -415.70 -174.75 -112.00 303.70
Profit Range
Combined Net Debit (paid) 51.65 35.30 -16.35 69.10 33.80
12752 to 13048
Stop Loss exit price @ 75% 38.75 22.40 Profit
SL Points @ 25% 12.90 12.90 -12.90 Loss Booked
Comfort Zone SL Hit SL not Hit
-189 to +107 PE 12900 24-Nov Sell 22.20 82.25 -60.05
PE 12600 24-Nov Buy 6.00 6.00 0.00
Ref Trade (Bull Put) Net credit (Received) 16.20 76.25 -60.05
Stop Loss exit price @ 150% 24.30 SL Hit Loss Booked -8.10
Trade No. 4.3 of Nov SL Points @ 50% 8.10
Total P/-L ( Loss 12.90 + Profit 33.80 + Loss 8.10) 12.80
 32

Base Trade
Rs. 42,000

Adjustment Trade Bear call / Bull put (when required)

Rs. 41,000

Total Capital
Rs. 83,000 That is, 1,107 per Unit
33
 Nifty Hybrid Butterfly System- Performance
Profit Loss # of Ref # of SL Trading
34
Month Week1 Week2 Week3 Week4 Week5 Mth Tot ROI
Weeks Weeks Trades Hit Days
1 Apr-20 Profit 129.58 13.16 55.65 28.00 49.12 275.51 24.9% 5 Nil 5 4 16
Nifty Move
2 May-20 Profit 40.41 35.55 100.29 0.96 177.21 16.0% 4 Nil 6 4 14
Nifty Move -514 181 -67 245
3 Jun-20 Profit 22.26 16.68 43.50 31.29 113.73 10.3% 4 Nil 7 6 16
Nifty Move 659 127 -46 224
4 Jul-20 Profit 23.30 21.05 44.85 22.99 26.09 138.28 12.5% 5 Nil 5 4 20
Nifty Move 165 130 -201 428 -6
5 Aug-20 Profit 14.35 32.55 38.85 29.10 114.85 10.4% 4 Nil 6 3 16
Nifty Move 47 103 105 261
6 Sep-20 Profit 43.78 85.38 4.72 21.13 155.00 14.0% 4 Nil 6 4 16
Nifty Move -28 -232 144 -379
7 Oct-20 Profit 18.19 -0.67 33.15 28.65 -13.50 65.81 5.9% 3 2 6 4 20
Nifty Move 404 316 146 254 -179
8 Nov-20 Profit 64.20 6.42 40.50 4.10 115.23 10.4% 4 Nil 4 5 16
Nifty Move 237 614 262 79
33 2 45 34 134
Total Profit 1155.61 104.4% 94%
Avg p.m 13.1% Prob of Profit 33.6% 25.4%
 35

Nifty Hybrid Butterfly System- Performance

Profit Loss # of Ref # of SL Trading
Month Week1 Week2 Week3 Week4 Week5 Mth Tot ROI
Weeks Weeks Trades Hit Days
1 Jan-20 Profit 9.45 -14.31 28.20 -51.14 -5.71 -33.51 -3.0% 2 3 6 4 20
Nifty Move 57 -273 104 -221 -79
2 Feb-20 Profit -32.61 -23.12 -11.85 23.04 -44.55 -4.0% 1 3 4 5 16
Nifty Move 91 96 -15 -449
3 Mar-20 Profit 71.79 14.56 79.16 113.63 279.14 25.2% 4 Nil 7 7 15
Nifty Move -372 -1665 -1138 144
7 6 17 16 51
Total Profit 201.08 18.2% 54%
Avg p.m 6.1% Prob of Profit
 Nifty Hybrid Butterfly System- Performance
Profit Flow
Base Adjustm SL Triger
36
Month Mth Tot ROI
Trade ent Saving
1 Apr-20 275.51 24.9% 70.40 162.07 43.04

2 May-20 177.21 16.0% -38.50 168.25 47.46

3 Jun-20 113.73 10.3% -21.20 69.10 65.83

4 Jul-20 138.28 12.5% 29.65 85.30 23.33

5 Aug-20 114.85 10.4% 20.45 51.20 43.20

6 Sep-20 155.00 14.0% 30.60 85.30 39.10

7 Oct-20 65.81 5.9% 30.50 13.40 21.91

8 Nov-20 115.23 10.4% 26.50 0.25 88.47

1155.61 104.4% 148.40 634.87 372.34

Avg p.m 13.1% 1155.61
 37
Profit Flow (Apr-Nov)

Base Trade Adjustment SL Saving

•149 •635 •372

•13% •55% •32%

Base Trade Adjustment SL Saving

•7.2% •4.2%
•1.7%
 38
SL Hit Twice
Base trade & Adjustment trade

P/-L for
SL P/-L for
# Month Week Trade No. That
Triger Trade
Week

Loss Profit Profit

1 Apr-20 4 4.3
16.05 10.15 28.00

Loss Loss Profit

2 Jun-20 1 1.2
29.55 15.95 22.26

Loss Profit Profit

4 Nov-20 4 4.3
21.01 12.79 4.10
 39
Apr-Nov
Profit Points 1156
# of months 8
# of Weeks 35
# of Trading Days 134

Average profit
Per month 144.50
Per week 33.03
Per day 8.63
 Profit Points 40
Calendar Hybrid
Comparative Spread Butterfly
Conslol

Apr-20 107.10 275.51 382.61

Calendar May-20 -0.35 177.21 176.86
& Butterfly Jun-20 161.80 113.73 275.53
Jul-20 30.55 138.28 168.83
Aug-20 58.80 114.85 173.65
Sep-20 43.05 155.00 198.05
Oct-20 207.65 65.81 273.46
Nov-20 162.35 115.23 277.58

Total 770.95 1155.61 1926.56

Invest / Lot 67000 83000 150000

Per Unit 893 1107 2000
ROI 86.3% 104.4% 96.3%
Avg p.m. 10.8% 13.1% 12.0%
 41
Capital Allocation
Calendar Spread & Butterfly System

Whether allocation to be as
Equal amount?
Or
Equal position size?

Both the systems run parallel and at times as hedge to each other.
It’s advisable to trade both the systems simultaneously
 42

✓ Do not allocate entire corpus to any one system. Allocate funds to

multiple systems
✓ Focus on system rather than strategy.
The trade can start with a particular strategy and keeps changing
into different strategies as adjustments occur
✓ System to be specific to index (nifty, bank nifty, currency) or a stock
✓ System should be supported by back test with 2 major criteria of
Returns of at least 2% per month and Probability of Profit (POP)
of at least 67%
 43

✓ Execute buy order first & then place sell order.

If using basket order feature, upload buy basket first & then place
sell basket - This will enable margin benefit for hedged positions
✓ Check always the open positions so as to ensure all legs are properly
executed in your account
✓ Stick to your trading plan & be consistent
 44
Next Batch
Butterfly System & Iron Condor for Nifty Options
(January 23 (Saturday)

Calendar Spread System for Nifty Options

January 24 (Sunday)

Upcoming
Bank Nifty Options Using set of 4 strategies

Nifty, Bank Nifty Expiry Day

 45

CA Ajay Shukla
Contact for any quey
+91 98672 56983
Welcome your views / thoughts
ajay.shukla123@gmail.com