What is the Batman Options Strategy? Comprehensive Guide

Options are a segment of derivatives that help traders generate profits, manage risk, and hedge against market volatility. Among the various options strategies available for different market conditions, the one we will discuss here is the “Batman Options Strategy.”

What is the Batman Options Strategy?

The Batman Options Strategy is a multi-leg neutral options trading strategy designed to be used when range-bound movements and low volatility are expected in the underlying security. This strategy is achieved by combining call rate spreads and put rate spreads on underlying securities of different strike prices with the same maturity.

This strategy is deployed when the underlying asset is expected to be neutral with no directional bias. For this strategy to be profitable, the underlying security must remain within range with minimal movement upon expiration.

erection

To deploy the Batman Options Strategy, you first need to construct the legs of options you need.

• Buy one of the out-of-the-money (OTM) call options.
• Sell ​​2 lots of deep out-of-the-money (OTM) call option strike price.
• Buy one of the out-of-the-money (OTM) put options.
• Sell ​​2 lots of deep out-of-the-money (OTM) put option strike prices.

Combining and applying the above legs together on the same strike price, same expiration date, and same security defines the deployment of the Batman strategy. The distance of the selected strike price from the spot price is based on the expected volatility of the underlying security.

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Let us take an example to clearly understand the above configuration. Assume Nifty 50 is trading at spot price 19120. We believe that the market is expected to move significantly down or up with high volatility. However, since the direction is more unclear, I will deploy the Batman options strategy. Here the 19120 spot price is rounded to the nearest strike price of 19100.

The option legs for a nice 50 hypothetical spot price of 19120 are as follows:

• First leg:- Buy 1 lot of call option with strike price of 19300 for which premium of Rs 20 is paid.
• Second leg:- Sell 2 lots of 19350 strike price call options at a premium of 13 rupees. Since you are selling 2 lots, the total premium will be 13+13= Rs 26.
• Third leg:- Buy 1 lot of 18900 strike put option for which premium of Rs 24 is paid.
• Fourth leg:- Sell 2 lots of put option with strike price of 18850 receiving premium of 18 rupees. Since you are selling 2 lots, the total premium will be 18+18= Rs 36.

Here, net premium received is calculated as the net sum of premiums paid and received on the option leg. In the above example, the net premium account is Rs.18.

That is, –20+26–24+36 = 18.

The margin required to deploy this strategy is higher compared to other options strategies. In the above example, the margin required to deploy the strategy based on the premiums received is approximately 1.5 lakhs.

maximum profit and maximum loss

• The strategy earns maximum profit when the underlying security expires at the strike price. Maximum profit can be achieved in either direction.

1. If the underlying security expires at the short call strike price, the maximum profit is calculated as follows:

Maximum Profit = Short Call Strike Price – Long Call Strike Price + Net Premium Received.

In the above example, the maximum profit is Rs 3400.

That means maximum profit = 19350 – 19300 + 18 = 68.

The quantity of Nifty in 1 lot is 50. So the maximum profit from 1 lot nifty 50 will be 68 x 50 = 3400.

2. If the underlying security expires at the sell strike price, the maximum profit is calculated as follows:

Maximum Profit = Long Put Strike Price – Sell Put Strike Price + Net Premium Received.

In the above example, the maximum profit is Rs 3400.

That means maximum profit = 18900 – 18850 + 18 = 68.

The quantity of Nifty in 1 lot is 50. So, the maximum profit for 1 lot of Nifty 50 will be 68 x 50 = 3400.

• The maximum loss for this strategy is unlimited. As the market takes direction and the spot price moves away from the strike price in either direction, you start to incur losses at expiration.

Break-even point

This strategy consists of two break-even points.

• upper break-even point = call sale strike price + (difference between call sale strike prices) + net premium received.

That is, 19350+50+18=19418. If the spot price moves beyond this point, the strategy will begin to incur losses at expiration.

• low break-even point = Sell Put Strike Price – (Difference between Sell Put Strike Price) – Net Premium Received.

That is, 18850–50–18= 18782. If the spot price falls below this point, the strategy starts losing money at expiration.

reward chart

From the payoff chart you can understand:

• If the price of the underlying security expires between the upper breakeven limit and the lower breakeven limit, the strategy will profit at expiration.
• The maximum profit can be located at the two peaks seen in the payoff chart. The strategy earns its maximum profit when the underlying security expires upon a short put exercise or a short call option exercise.
• The strategy will incur a loss if the price of the underlying security is above or below the upper and lower breakeven points, respectively.

Advantages of Batman Options Strategy

• Profits are generated when the underlying security moves in any direction within a defined range.
• The strategy is best suited for markets with low to medium volatility.
• Option legs can be adjusted based on the trader’s view of the market moment for higher profitability ratios.
• Time decay has a positive effect because there are more sell option legs to buy legs.
• Mathematically, the odds of profit are high.

Disadvantages of the Batman Options Strategy

• The price of the underlying security must expire within that range.
• If the market has direction, the losses incurred will be unlimited.
• Requires higher margins compared to other options.

Closing

After understanding the unique setup of the Batman Options Strategy, we can conclude that this strategy has varying scope and applicability if you have a high-volatility range-limited view. The strategy favors neutral price action, so if the underlying security moves in either direction, the strategy incurs a loss.

If the underlying security experiences no price movement, the time value effect causes the strategy to expire positively. With a better understanding of options strategies, you can improvise setups for good risk-reward ratios through better risk management.

Written by Deepak M

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