If you are just getting started with options trading, you may prefer to implement simple options trading strategies like vertical spreads or two-legged trades. However, as you gain more experience, you may be more comfortable with advanced strategies that involve three or more trades. One such multi-legged position is the Batman strategy.
With an advanced options strategy builder like Options B.R.O. from Samco Securities, you can leverage the Batman strategy even if you are a beginner at options trading. Nevertheless, whether you are a beginner or a seasoned F&O trader, you need to understand the nuances of this strategy and how it works. Check out all these details and more in the following article.
What is the Batman Strategy?
The Batman strategy is a four-legged options trade that essentially combines a call ratio spread and a put ratio spread. In a call ratio spread, you buy and sell call options in a specific ratio (like 1:2 or 1:3). In a put call ratio spread, you buy and sell put options in a specific ratio. In both cases, the options traded have the same underlying asset and expiry date, but different strike prices.
So, when you combine the two ratio spreads, you get the four-legged Batman strategy. The strategy gets its name from the shape of the P&L graph it produces — which has two peaks and a dip in the middle. Together, these elements look like bat ears and resemble the Batman logo.
Setting Up the Batman Strategy
To construct the Batman strategy whether manually or using an options strategy builder, you need to implement the following four trades:
- Trade 1: Purchase one out-of-the-money (OTM) call option
- Trade 2: Sell two further out-of-the-money (OTM) call options
- Trade 3: Purchase one out-of-the-money (OTM) put option
- Trade 4: Sell two further out-of-the-money (OTM) put options
An OTM call option is one whose strike price is above the stock’s current market price, while an OTM put option is one whose strike price is below the stock’s current price.
When to Use the Batman Strategy?
The Batman strategy is best suited for very specific market conditions. Ideally, you should set up this trade when the implied volatility (IV) of the asset is high. This leads to higher premiums, so you can earn more from the 2x sold options and enjoy a net credit while setting up the trade. That said, you should also only use this strategy if you expect the volatility to decrease by expiry and the stock price to be range-bound and relatively stable.
Manually tracking the markets and implementing this complex strategy can be challenging even for the most seasoned traders. Here’s where Samco’s options strategy builder can be incredibly useful. All you need to do is choose the options contract you want to trade in, the expiry date for that contract and your market outlook — which may be bullish, bearish, neutral or volatile.
If you have a neutral market view, Options B.R.O, Samco’s options strategy builder, evaluates 1000s of strategies and selects the top 3 that align with the outlook you have. These strategies carry different levels of risk, making them suitable for conservative, aggressive and moderate risk-takers. You can choose from the top 3 or you could look into hundreds of other strategies that align with your market view. Among these, you will also find the Batman strategy.
The Batman Strategy: Key Formulas
Now that you know the setup involved and the timing of the trade, let us take a closer look at how you can compute the total cost of building this strategy, its maximum profit and loss and other key metrics.
- Cost of the Trade
The cost of the trade is the difference between the total premiums paid for Trade 1 and Trade 3 and the total premiums received for Trade 2 and Trade 4.
- Maximum Profit
The Batman strategy attains peak profitability when the stock price at expiry equals the short call strike price or the short put strike price. In either case, the formula for the maximum profit from this trade can be calculated as follows.
If the stock closes at the short call strike price at expiry, then:
Maximum Gain = Short Call Strike Price – Long Call Strike Price + Net Premium Received
If the stock closes at the short put strike price at expiry, then:
Maximum Gain = Long Put Strike Price – Short Put Strike Price + Net Premium Received
Depending on how you expect the price to move by expiry, you can use either of the above formulas to check the maximum profit you can earn from this trade.
- Maximum Loss
A trade based on the Batman strategy incurs the maximum loss when the stock price becomes strongly directional and trends either upward or downward — moving away from the strike prices. The loss increases as the price trends further away and is therefore technically unlimited.
- Break-Even Points
Depending on how the price of the asset moves by expiry, the Batman strategy has two break-even points. The formulas for these price points are as follows:
Upper Break-Even Point = Short Call Strike Price + (Difference Between the Long and Short Call Strike Prices) + Net Premium Received
Lower Break-Even Point = Short Put Strike Price – (Difference Between the Long and Short Put Strike Prices) – Net Premium Received
These two points represent the price levels at which you incur no loss and earn no profit. If the price moves above or below this range, the trade starts to incur losses.
An Example of the Batman Strategy
Let us discuss an example to understand the Batman strategy better. Say you expect the stock of a company to trade in a neutral, limited range over the next month. This scenario may be an ideal candidate for the Batman strategy. So, you decide to use an options strategy builder to construct and implement this technique.
Say the company’s shares are currently trading at Rs. 443. Here’s how you need to build the Batman strategy using the company’s call and put options, each with a lot size of 100 shares.
| Trade | Details | Strike Price | Premium Received or (Premium Paid) |
| Trade 1 | Purchase one lot of Rs. 450 call option at a premium of Rs. 5.95 each | Rs. 450 | (Rs. 595) |
| Trade 2 | Sell two lots of Rs. 460 call options at a premium of Rs. 3.35 each | Rs. 460 | Rs. 670 |
| Trade 3 | Purchase one lot of Rs. 435 put option at a premium of Rs. 4.55 each | Rs. 435 | (Rs. 455) |
| Trade 4 | Sell two lots of Rs. 425 call options at a premium of Rs. 2.05 each | Rs. 425 | Rs. 410 |
| Net Premium Received or (Paid) | Rs. 30 | ||
All the options have the same expiry date. Here is how the strategy will play out based on different possible prices at expiry.
- Scenario 1: Stock Price is Between Rs. 435 and Rs. 450
Let’s assume the stock price at expiry is Rs. 440. In that case, all the four trades expire worthless. So, your net profit is the net premium received, i.e. Rs. 30.
- Scenario 2: Stock Price is Below Rs. 425
Now, let’s assume the stock price at expiry falls below the short put’s strike to Rs. 410. In that case, here is how the four trades will pan out.
| Trade | Explanation | Computation | Profit or (Loss) |
| Trade 1 | The call option expires worthless and the premium you paid is a loss. | — | (Rs. 595) |
| Trade 2 | The two call options expire worthless and the premiums you earned become your profit. | — | Rs. 670 |
| Trade 3 | The long put is profitable and you gain because you are the buyer of the options contract. | [(Rs. 435 — Rs. 410) x 100 shares] — Rs. 455 | Rs. 2,045 |
| Trade 4 | The short puts are profitable for the buyer of the options. However, since you are the seller, the trade results in a loss for you. | Rs. 410 — [(Rs. 425 — Rs. 410) x 200 shares] | (Rs. 2,590) |
| Total Loss From the Trade | (Rs. 470) | ||
- Scenario 3: Stock Price is Above Rs. 460
Now, let’s assume the stock moves in the opposite direction and rises past the short call strike price to Rs. 475. The outcomes for the trades in the four-legged position will be as follows.
| Trade | Explanation | Computation | Profit or (Loss) |
| Trade 1 | The long call is profitable and you gain because you are the buyer of the options contract. | [(Rs. 475 — Rs. 450) x 100 shares] — Rs. 595 | Rs. 1,905 |
| Trade 2 | The short calls are profitable for the buyer of the options. However, since you are the seller, the trade results in a loss for you. | Rs. 670 — [(Rs. 475 — Rs. 460) x 200 shares] | (Rs. 2,330) |
| Trade 3 | The put option expires worthless and the premium you paid is a loss. | — | (Rs. 455) |
| Trade 4 | The two put options expire worthless and the premiums you earned become your profit. | — | Rs. 410 |
| Total Loss From the Trade | (Rs. 470) | ||
Pros and Cons of the Batman Strategy
The Batman strategy can be beneficial in many ways, but it also has some downsides that you need to be aware of. Let us explore these two sides of the strategy.
The pros of the Batman strategy include:
- Profitability in range-bound markets
- High probability of profit when implemented suitably
- Adjustable strategy legs
- Positive effect of time decay since there are more short options than long options
However, it also has some limitations:
- Possibly unlimited losses
- Higher margin requirements since the number of short positions is twice the number of long positions
- Highly complex strategy
Conclusion
This sums up the Batman strategy. Now that you know how to construct it, where to find the break-even points and what the maximum profit and loss are, you can better understand when to use this strategy and how to make the most of it. However, in dynamic market conditions, manually calculating these figures can be cumbersome and prone to errors.
To avoid these issues, you can rely on Options B.R.O, the advanced options strategy builder available in the Samco trading app. With this analytical tool, which is available free of cost to Samco users, you can build, research and optimise the Batman strategy to maximise the profits and minimise risk. Furthermore, you can also make use of the range of Samco options calculators to compute the fair value of options contracts, the brokerage for your options trades and the margin required for these trades, if any.