Well, people do option trading to earn money in the share market because they have to earn lot of money in a very short time. So, what do people generally do for that and how do they do it? Let’s understand this first. What do people do? They understand that they can trade in options. So, people start trading in Nifty and Bank Nifty in options and you know that most people buy. They buy the call option and put option. You know this much so far.
So, when do we buy the call option? When we feel that the market will go up and when do we buy the put option? We buy when we feel that the market will fall from here’s, if we feel that the market will fall, then we have to buy the put option and if we feel that the market will increase, then we have to buy thecal option. This is the most basic thing that we understand. But despite this, why do people burn their hands? Why is it that people cannot make money? Now I will try to explain to you step by step and then I will give you a strategy with which you are going to earn money.
Now here we have talked about buying call option and put option. Let’s take an example and assume that Nifty is running for 17000.So, if Nifty is running for 17000 and you bought a call option, let’s assume that you bought a call option for 17000 on Add the money. Now you bought ton option on Add the money and you have to pay 200 rupees. It is a premium of 200rupees. So, now you understand that if I am buying an option for 200 rupees on Add the money of Nifty, then this 200rupees is at least a break even for me. Until Nifty goes to 17200, after that only I will get profit.
Before that, I will not get profit. You also understood this. If you bought call option for 17000 and if 200 points increase, then you are not getting any profit. Thesis your break even. You want 300-400 points to increase, but you know that the move of300-400 points is not available every day and if it is not available according to the day, then you have to wait.
It will take another 1-2 days and as time goes by, you also understand that the theta decays according to the time value. The option you bought for 200 rupees will be of 150 rupees as time goes by, then it will be of 100rupees and your loss will be regular. If the market did not move according to you, then what should you do?
Is there any strategy by which we know how much profit we will get and we will have at least losing the market? If there is a loss, then it will be this much. Today I am going to tell you. Now you understand how people burn their hands. People buy options and trade in naked options. There is no strategy. So here you bought the call option, bought the put option, people generally do this, but there is a strategy, which we call Iron Butterfly. You must have heard Butterfly till now, but what is Iron Butterfly, I am going to tell you. So now you understand. If a person who had bought, the buyer who had bought the call option or put option, then the premium he gave, who did he give?
You will say that he gave it to the seller. He gave the premium to the seller. Let’s assume that the call option was of 200 rupees or the put option is of 200 rupees, then the buyer gave it to the seller and as time goes by, the rate of this option decreases. If it is 200 to 100 rupees, then the buyer will have a loss of 100 rupees, but the profit will be of the seller. So if you want, you can sell the options, you can sell the call option and put option. If you feel that there is no big move coming, the market will be sideways, then before this, I hope you know that we have made a playlist of option strategies.
I have already told you lot of strategies that if you have a view of the market that the market will increase and be bullish, then which strategies to use. If you have a view of the market that the market will fall, then which strategies to use. You are learning now, I have already taught you two sideways strategies, which I will tell you and today we will learn such strategies first, which you are going to trade in the sideways market. So now what I want to tell you is that the sideways market will remain, that is, the market will not go up or down.
You will see a range-bound market, a sideways market, so for a range-bound market, you can use another strategy, but before that, the strategies we have told you, what strategies were they? Let’s understand them too. I told you that you can make a short straddle. I will write here that you can make a short straddle. What is a straddle? Straddle means at the money, you have call option and put option. If you are doing long, which we will understand in the coming blog, if you do long, then you have to buy them and if you do short, then you have to sell them.
As soon as you do short, if the market increases or decreases, you will have a profit in the sideways market on both sides, but if the market falls too much, then you can have unlimited loss and if the market increases too much, then you can have unlimited loss and if the market stays where it is, then you have a max profit at a peak. You have understood this on short straddle. Now how does it happen? I will explain to you. If you sell the call option and the market does not increase, then the example I gave you that the option of₹ 200 at the money will be zero.
Who will get it? You will get it because you sold it. Similarly, if someone bought the put option and the market did not fall too much, it remained range bound, then this 200 will be zero. Who will get it? Again, who will get it? The one who has sold both the options, then if you sold both and the market remains sideways, then you will earn profit, but to a limit.
When the market increases too much, then you can have unlimited loss and if the market falls too much, then you can have loss. Now here we understood short straddle. We also understood strangle that if we want to remove this peak, that we want to get profit on a flat surface, not at the peak, then we can make strangle.
You don’t have to do anything in this. The add the money options you sold in that, Aim giving the example again to explain that if Nifty is at ₹17000 and you sold thecal option and put option at 17000, then what will happen? You have sold it at add the money, then it will be straddle, but if you have out of the money, now what will be happening the case of out of the money call, for example, it will be₹ 17200 and for put option, what will happen? It will be 16800, so if you sold this 16800and 17200, then it becomes strangle.
So the graph looks like this, but inside this also you can have unlimited loss on both sides. Now our question is that if there is a strategy by which our loss stops here, we have a limited loss, then what is that strategy? Its name is Iron Butterfly, which we are going to learn today. Now why am I saying Iron Butterfly and I will tell you after this that why this strategy is so effective and whit is better than short straddle and short strangle. I will tell you why it is better than both.
So what will happen here, first of all, butterfly, why are we calling it butterfly, when you made straddle, then you were making profit in the sideways market, but after point of time, you could have unlimited loss. So you want my loss to stop, my wings should be put here, so that if the market goes down or increases, then my loss on both sides becomes limited instead of unlimited. So the wings you want to put and want to stop your loss like iron, so we call it Iron Butterfly. Now how will this Iron Butterfly be made? if you are already following the playlist for a longtime, so you will understand everything.
Now when we made the straddle, we sold the call option and put option, now if we sold the call option, then when will we get the benefit, who buys thecal option, the person who buys it thinks that the market will increase, but if the market does not increase, then we will get profit, so we sold both the call option and put option here, we sold it,
so we were getting maximum profit at the peak where we sold both at the money, but when we were getting loss that if the market increases a lot, then what to do now, if you want to stop the loss, because the seller can have unlimited loss, you already know that, so now the seller wants to stop his loss, so you can hedge your position, how can you hedge, how can you stop your loss, I will tell you, if you buy a call option, which is out of the money option, why will we buy out of the money, why will we buy OTM, because it will be cheaper for us, now understand, when a call option is at the money,
then let’s assume it is of 200 rupees, but if it is out of the money, then it may be of 80 rupees, it may be of 50 rupees, the further we go, the cheaper it will be, so an out of the money option, we sell it at the amount and now the fare will go duet the moment, so we will option, what we did, we bought it to hedge our position. We received this premium and say it is 100 rupees ASD, so we sell at the price that what we will give this premium, then also we will be in profit. You got, hi, back up, and now understand, I got 200 rupees, I gave 50 rupees, so I am in profit of 150 rupees.
Good enough we go for this thing, 0000, and now we get the 12000 rupees, and similarly, if I had and another token looking into that, so now I said it as 20 AUD, now again, the dolly is will say it is DC, I will have fallen the market and I could have incurred unlimited losses, to avoid that, I bought put option. Now, as soon as I bought put option here, what will be the benefit, understand this benefit.
I bought put option, so if the market falls, if had bought put option, then I could have had unlimited profits and if I have sold put option, then if I have sold put option, then if the market falls, then I can have unlimited losses, which Aim hedging by buying put option, but again it is out of the money. So if at the money it is 200 rupees, again let’s take an example, it is of 50 rupees, so again I am going to earn 150 rupees, I earned a total of 400 rupees and I gave 50,50, 100 rupees, so 300 rupees will be my net profit, for example, and if you know that Nifty is our lot of 50, then for example, I can have a profit of 15000.
Now my loss will be limited. I will again go to the strategy builder, I will show you how it works and you can also make these strategies. What is the benefit of learning strategies, the loss is very less and the profit is very high and the iron butterfly strategy, now people will say that you have not told the butterfly, you are directly telling the iron butterfly I will also tell you about the butterfly strategy?
Sphere I will take you to my computer screen and I will show you exactly how it looks and its risk to reward ratio is very good, you can get reward 4 times, 5 times and the loss here, you can see that the males is here, I have made an example of an iron butterfly strategy for you, I will show you, so now we are on sensible, when you go to sensible, you click on sensible, you will see the strategy builder,
when you click on BD, you will see the readymade strategies, here when you go to neutral, you are expecting to trade in the sideways market, then you will click on the iron butterfly, when you click on the iron butterfly, you can see that in this strategy, we are taking the example of Bank Nifty, so look at Bank Nifty, Bank Nifty, the market has closed now, it has closed at approximately39000, so what happened to39000, so at the money, if you see the put option and call option, then we sold both the call option and put option, which was our straddle strategy, here 418 and 420 which is the premium here,
we received it and similarly I told you to hedge your position, we have put option but out of the money, for example of 38500, youkan do it more or less, youkan do it more or less, it does not matter, you bought the put option, so you hedged your position, similarly here you have a call option of 39500, again out of the money, now the market is almost at 39000 and we are talking about 500 points ahead, so if we are talking about 500 points ahead, then we are talking about an out of the money option, which we have again bought, so we gave 210 here and 230 here,
so here we have given 440, but how much did we receive, 420 and 418, so you know that there will be a profit here, now the max profit is already defined that 9970.71, whatever is written here around 10,000, thesis your maximum profit and how much loss can be here, 2500, means1 is to 4, your reward to risk ratio is here, one more thing I would like to tell you, understand this, if I show you funds needed, so you need 63,000 funds, but if I remove here, which we bought out of the money option,
then the requirement of your funds will increase suddenly, it will be 1.66, whenever you make a strategy, either you use the strategy builder, you can use sensible, make strategies here and the second thing is that you are getting readymade strategy here, but if you are going to make an iron butterfly directly in Upstox, then you can make it,
I have given you all the concepts, so you buy first and then sell, if you buy first and do it immediately, because the prices here can fluctuate with time, so buy first immediately and then sell, then the requirement of funds will be reduced, in 63,000 only youkan make an iron butterfly here and you can earn about 10,000by investing 63,000 and the loss is only of 2500,
so the maximum loss of 2500 will be there, if my view is correct, for that you have to see the price action, you definitely use the technical analysis that you have learned so far to trade, I understand that, but if your view is correct, then iron butterfly is such a great strategy, you can earn 4 times more and to lose, how much will you earn, if you see the ratio here, then according to 1 is to4, so you can earn 10,000by losing 2500, it is a good strategy which you can try, now told you that I will tell you what is the butterfly strategy,
what we are doing in iron butterfly, we are trading in both call and put options, but when we talk about butterfly strategy, to use butterfly strategy, first of all, our view matters, if our view is that the market will go upend down, then we will only trade in call options, if our views that the market will fall from here, then we will only trade in put options, but in iron butterfly, we understood that we are trading in both put option and call option, it looks the same, this butterfly will look like this, but if we are talking about butterfly, then what are we going to do in butterfly strategy,
first of all, we are going to receive the premium, for that we will sell and we will sell the call options, here we are going to do everything in call option, so here we will understand the ratio, we will sell 2lots, here we have to sell2 lots of call option and call option will be at the money for you, now I am saying at the money, if I make it out of the money, then in the coming blogs we will also understand about condor, then you will understand what is the requirement of condor, wait for the next strategies, I will tell you about it,
so here you understood that what we did, we sold two call options, again we could have maximum loss, so to protect it, what are we going to do, we will buy the call option out of the money and in the money, understand that we will buy one in the money call option and one out of the money call option, I will show you this on the strategy builder, we are going to do exactly this, we have not traded in put options, we have sold two call options here, at the money and one in the money and one out of the money call option, but the risk to reward ratio of iron butterfly is better,
because you will hear butterfly many times, so I have explained you butterfly also, you will get to know how it works, so what are we going to do here, this is iron butterfly, so we are not going to trade in put option, I will remove it from here, I will remove put option from here, and the call option that were selling, I will make its quantity 2 in front of you, and what am I going to do here, because we are not going to trade in put option, so I will call it, as soon as I called it, it became in the money, it became 38500 in the money, so I went inside 500 points and came out 500 points,
so when went inside, it became in the money, when I came out, it became out of the money, I have not seen the graph here, but see here, a butterfly has already been made for you, so the butterfly has been made here, now here you have sold two lots, so remember the ratio, you can do four instead of two, but if you do four, then the out of the money and in the money you have bought, you will have to double the quantity of it, so here you are also understanding that your butterfly is being made in the same way, here you are also understanding that what is the maximum loss and maximum profit,
so this is where you can go, you can go to the strategy builder, time to time, according to which strategy, which risk to reward ratio is working for you, so it is very similar to what we have talked, here your maximum loss is 2000 and maximum profit is above 10000,so here we are understanding that the risk to reward ratio is better for you, so you can choose it, but what is your view of the market, again sideways market, so in the sideways market, you know that if it is at the peak,
then your maximum profit will be here, so maximum profit is at the peak, at the money and you have hedged your positions that your loss is limited, how did you like the strategy, you can tell, you can see the funds required here, so it is very similar to 62,900 something funds are required, so it is around63,000, so when are you going to use this strategy, when your view of the market will be sideways market and butterfly market, which people may have a concept, I did not understand at once,