The Long Put Butterfly is a neutral strategy where a trader will be bearish on the volatility i.e. he thinks the market will have sideways kind of movement and will not rally sharply in either direction in the near future. This strategy involves sale of 2 ATM Put Options, buy 1 ITM and 1 OTM Put Option. The risk and reward are limited.
Long Combo Option Trading Strategy is implemented when a trader is bullish in nature and expects the stock price to rise in the near future. Here a trader will sell one ‘Out of the Money’ Put Option and buy one ‘Out of the Money’ Call Option. This trade will require less capital to implement since the amount required to buy the call will be covered by the amount received ..
Upper Breakeven Point = Strike Price of Highest Strike Long Put - Net Premium Paid, Lower Breakeven Point = Strike Price of Lowest Strike Long Put + Net Premium Paid
Call Strike + Net Premium
LONG PUT BUTTERFLY Vs LONG COMBO - When & How to use ?
LONG PUT BUTTERFLY
LONG COMBO
Market View
Neutral
Bullish
When to use?
The Long Put Butterfly is a neutral strategy where a trader will be bearish on the volatility i.e. he thinks the market will have sideways kind of movement and will not rally sharply in either direction in the near future.
This strategy is used when an investor Bullish on an underlying but don't have the required capital or the risk appetite to invest directly into it.
Action
Buy 1 OTM Put, Sell 2 ATM Puts, Buy 1 ITM Put
Sell OTM Put Option, Buy OTM Call Option
Breakeven Point
Upper Breakeven Point = Strike Price of Highest Strike Long Put - Net Premium Paid, Lower Breakeven Point = Strike Price of Lowest Strike Long Put + Net Premium Paid
Call Strike + Net Premium
LONG PUT BUTTERFLY Vs LONG COMBO - Risk & Reward
LONG PUT BUTTERFLY
LONG COMBO
Maximum Profit Scenario
Strike Price of Higher Strike Long Put - Strike Price of Short Put - Net Premium Paid - Commissions Paid
Underlying asset goes up and Call option exercised
Maximum Loss Scenario
When Price of Underlying <= Strike Price of Lower Strike Long Put OR Price of Underlying >= Strike Price of Higher Strike Long Put
Underlying asset goes down and Put option exercised
Risk
Limited
Unlimited
Reward
Limited
Unlimited
LONG PUT BUTTERFLY Vs LONG COMBO - Strategy Pros & Cons
LONG PUT BUTTERFLY
LONG COMBO
Similar Strategies
Iron Condors, Iron Butterfly
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Disadvantage
• Risk is higher than reward. • When the underlying price is in between the two breakeven points, time decay hurts the position.
• Losses can keep on increasing as the price of stock goes down. • High risk strategy.
Advantages
• Limited maximum loss. • Unlimited profit potential, risk only limited to loss of premium. • Benefits from low volatility.
• Capital investment is low and returns are high. • Unlimited reward, returns keep on increasing with the increase on stock price. • Leverage facility provided by this strategy is very beneficial.
