Butterfly Spread & Ratio Spreads

Lesson Content

Butterfly spreads and ratio spreads are advanced options strategies that Indian traders can employ to profit from specific market conditions while limiting risk. A butterfly spread involves buying one in-the-money call, selling two at-the-money calls, and buying one out-of-the-money call (or the reverse with puts), creating a position that profits if the underlying stock price remains stable near the strike price. For example, with Nifty at 19,500, you could buy a 19,400 call, sell two 19,500 calls, and buy a 19,600 call, paying a small net premium. Ratio spreads involve unequal numbers of options contracts, like buying one call and selling two higher strike calls, which profits if the underlying moves moderately in either direction. With Reliance at 2,500, buying a 2,450 call and selling two 2,500 calls could generate income while capping upside above 2,550. These strategies require precise risk management and understanding of volatility impacts.