This strategy is implemented when a trader is bearish on the volatility of market and neutral on the market movements. A trader will buy 1 OTM Put Option, sell 1 ATM Put Option, sell 1 ATM Call Option, buy 1 OTM Call Option. Due to offsetting of long and short positions, this strategy bags limited profit with limited risk.
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 Short Call + Net Premium Received, Lower Breakeven Point = Strike Price of Short Put - Net Premium Received
Call Strike + Net Premium
IRON BUTTERFLY Vs LONG COMBO - Risk & Reward
IRON BUTTERFLY
LONG COMBO
Maximum Profit Scenario
Net Premium Received - Commissions Paid
Underlying asset goes up and Call option exercised
Maximum Loss Scenario
Strike Price of Long Call - Strike Price of Short Call - Net Premium Received + Commissions Paid
Underlying asset goes down and Put option exercised
Risk
Limited
Unlimited
Reward
Limited
Unlimited
IRON BUTTERFLY Vs LONG COMBO - Strategy Pros & Cons
IRON BUTTERFLY
LONG COMBO
Similar Strategies
Long Put Butterfly, Neutral Calendar Spread
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Disadvantage
• Large commissions involved. • Probability of losses are higher.
• Losses can keep on increasing as the price of stock goes down. • High risk strategy.
Advantages
• Less amount of capital investment, steady income with low risk. • Traders can predict maximum loss and profit. • Versatile strategy, investors can transform position into bear call spread or bull put spread easily.
• 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.
