The Batman Trade With Broken Wing Butterflies | Live Example On Nifty

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In this video, we would be discussing an interesting options strategy known as the Batman trade. We would be using Broken Wing Butterflies to construct this trade.

How to construct a batman trade with broken wing butterflies:

We would be using two broken wing butterfly structures, one on the call side and one on the put side, to construct the batman trade.

We should first identify options with a delta of These would be the options that we would sell. We should then buy options - one 300 points further OTM and one 100 points closer to the spot price than the sold options.

Although there are many sources that allow you to find the delta value of an option I prefer the Edelweiss Mobile Trader app for its ease of use.

Open the Edelweiss Mobile Trader App. Go to the Derivative section in Watch Markets and then click on Option Chain. Select expiry date 27 August 2020 from the dropdown menu on the right. Click on the Gear icon and enable Greeks and you would get to see the Greeks associated with each strike price. Enable All Strikes. Scroll further down. A close look at the Call options on the left would reveal that the 11700 strike price has a delta value of Similarly a close look at the Put options on the right would reveal that the 10500 strike price has a delta value of Now that we have determined the options that have a delta of about let’s see how we can construct a batman trade with broken wing butterflies using these values.

Example:

Nifty is at 11, on July 27th, 2020. A batman trade with broken wing butterflies can then be constructed as follows:

Buy one lot of 27th August 10200 strike price Put at 61
Sell two lots of 27th August 10500 strike price Put at
Buy one lot of 27th August 10600 strike price Put at

Buy one lot of 27th August 11600 strike price Call at 104
Sell two lots of 27th August 11700 strike price Call at 80
Buy one lot of 27th August 12000 strike price Call at

Note that the 11600 strike price Call and the 10600 strike price Put are 100 points closer to the spot than the sold options. And the 12000 strike price Call and the 10200 strike price Put are 300 points further OTM than the sold options.

Margin Requirements:

The margin required for the above setup is about ₹78760 and the capital required is about ₹ lakh. Enter the buy option trades first to get the maximum benefit of the new margin rules. The probability of profit at expiry is about 83% for this strategy.

Capital is defined as the amount of free cash required in your account to enter this trade, while margin is defined as the amount of free cash required in your account to maintain this trade, once you enter it.

Calculations:

Net credit = The sum of all options sold - The sum of all options purchased = [2 x ( + 80)] - [61 + + 104 + ] = - 333 =
Fixed Profit = Net credit x lot size = ₹3270
Max Loss at Expiry = ₹11730
Max Profit at Expiry = ₹10770
Upper Break Even Point = 11844
Lower Break Even Point = 10356

Risk graph:

From the risk graph it is evident that the strategy has a wide profit zone and that explains the high probability of profit. There are two break even points. The upper break even point is at 11844 and the lower break even point is at 10356.

The maximum profit at expiry is ₹11730 and the maximum loss at expiry is ₹10770. Also the setup gives you a fixed profit of about ₹3270 if the underlying ends in between 10600 and 11600 at expiry.

Now let’s look at one of the common mistakes made by the beginners when they start trading options. On the other side of the video we will look at some takeaways from the batman trade.

Some Takeaways:

A broken wing butterfly, when constructed correctly, can eliminate our risk to one side. But with the batman trade we are again introducing risk to both sides, but in the process increasing the amount of profit made.

The batman trade should always be done for a net credit. Else you would increase the risk.

While the broken wing butterfly is a range bound strategy with a bullish/bearish bias, depending on how you construct it, the batman trade is a neutral, range bound strategy, just like an Iron Condor.

Although the risk reward ratio of the batman trade is attractive, the maximum profit can only be realized when the underlying is at one of the middle strikes at expiration.
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