Category Archives: Derivatives

Exotic Option Strategies – Long Iron Butterfly

Have you ever wondered what happens if you combine two simple options trade together or if you combined them would they create something new and exotic? Well, the answer is both yes and no.
Some strategies when combines would give you a new strategy – One such strategy is Long Iron Butterfly.

The Simple Long Butterfly
A simple butterfly spread is when a trader would Buy put (or call) A, sell two puts (or calls) at higher strike B, buy put (or call) at equally higher strike C. The pay off is to limit the downside on extreme moves but gain if the market remains rangebound.


Long Iron Butterfly
On the other hand a Long Iron Butterfly is when a trader would Buy Straddle, sell Strangle with strike points outside the upper and lower strikerange of the Straddle, e.g. Sell a put (A), buy a put and a call at higher strike (B), sell a call at equally higher strike (C).


The payoff here is that the trader expects a move on either sides of the trade and gains on the premium.


Interetingly the payoff’s for both the strategies is in opposite directions.

So much for the identical strategy names but for opposite pay off’s!!

Lesser Known Derivative Strategies for volatile times – Jelly Roll and Put Ladder

Most of us would have heard about the classical derivatives strategies like Straddles and Strangles, but the world of derivatives trading has much more to offer. Jelly Roll and Put Ladder are two of the lesser known strategies which are quite useful in volatile times.


Long Jelly Roll

This is a time value trade (involving the sale and purchase of options with different expiry months) and as such cannot be adequately plotted in terms of its risk/reward profile.


The trade:

Buy put, sell call at same strike price in near expiry month, sell put, buy call at same strike in far expiry month (the strike price in the far expiry need not be equal to the strike price in the near expiry).


Market expectation:

Direction neutral/volatility neutral. This trade consists of a short synthetic underlying in the near month and a long synthetic underlying in the far month. The holder will benefit if the differential between the futures prices of the two expiries (or the cost of carry differential in the case of premium up front options) widens.


Profit & loss characteristics at expiry (of near synthetic):

The potential profit of this trade is restricted as it arises from a widening of the futures price differential of the expiry months in question. After the expiry of the near term options, the holder is left with a long synthetic underlying position. The holder will therefore benefit from a rising market after the first expiry, and will be adversely affected by a falling market after the first expiry.


Long Put Ladder




The trade: Sell put (A), sell put at higher strike (B), buy put at an even higher strike (C).


Market expectation: Direction bullish/volatility bearish. Holder expects underlying to(continue to) be between strikes A and B and firmly believes that the market will not fall.


Profit & loss characteristics at expiry:


Profit: Limited to the difference B-C, plus (minus) net credit (debit). Maximised between

strikes A and B.


Loss: Unlimited if underlying falls. At C or above, loss limited to net cost of position.


Break-even: Lower break-even reached when the intrinsic value of the purchased put C

plus (minus) net credit (cost) is equal to the intrinsic value of the sold options A and B.

Higher break-even reached when underlying falls below strike C by the same as the net cost of the position.







Low Risk Options

Strangles and Guts are widely used strategies in the derivative markets. Both of these are option strategies using a Call option and a Put option each.
Here we explore the difference between these two strategies and see how they can be used together to produce low risk returns.
What is a s Strangle? Strangles are created by either buying or selling, a call option and a put option. When we create this position by buying options, we call it a Long Strangle.
Similarly, when we create it by selling options, it is called a Short Strangle. The important point here is that the Put option has a lower strike price than the Call option. Table 1 and Chart 1 explains the pay off of a Long Strangle on the Nifty. The total premium outlay is Rs 70 + Rs 25 = Rs 95. The break-even points are 4004 and 4295 (calculations not shown here). 

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