If you’re new to options trading and seeking a low-risk, high-reward strategy to generate profits, the Iron Butterfly Option strategy might be the solution you’re searching for. This approach requires limited capital, which makes it an ideal choice for beginners. For instance, if you have Rs. 60,000 to invest in options, you can utilize this amount to trade within a predetermined price range and obtain a steady income.
Here’s an example to explain the idea better. The strategy necessitates trading in two Call and two Put options dispersed across three different strike prices. Let’s assume you purchase an OTM call option and an OTM put option for a stock valued at Rs. 500 each, along with another set of ATM CE and ATM PE with the same strikes. The objective is to earn profits from relatively stable markets without hedging the positions against unforeseen volatility.
Suppose the stock is trading at 500, and you anticipate the prices to fluctuate by a maximum of 25 points in either direction, which implies that the price is expected to be between 475 and 525. In this case, you can buy Call and Put options of strike 525 and 475, respectively, and sell ATM options of 500 strikes. By doing this, if the price remains within the upper and lower bands, you can profit from the position since the premium decay of ATM strikes is more significant than that of OTM strikes. The net premium received from selling ATM strikes should be greater than the premium paid on the OTM strikes.
The Iron Butterfly Option strategy provides a clear risk-reward ratio, allowing you to make informed trading decisions. The total premium amount is the only maximum possible loss, which implies that your risk is restricted.
If you’re interested in trying out this approach, you can explore the robot-based butterfly strategy on AlgoBulls. However, it’s crucial to bear in mind that trading always involves some degree of risk, so make sure to comprehend the risks involved before investing your hard-earned money.
In conclusion, the Iron Butterfly Option strategy is an excellent way for novice traders to book profits in the options trading market. With a clear risk-reward ratio and limited loss, it’s a low-risk, high-reward strategy that can maximize your limited capital.