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.
This strategy is applied when trader goes long on the underlying asset i.e. he buys the stock in cash market. He has a bullish view and expects the market to rise in the near future, but simultaneously has the fear of downward movement of the markets. In order to cover his position from vulnerabilities he buys one ATM Put Option of the same underlying asset. Here, a trader wi ..
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
Purchase Price of Underlying + Premium Paid
LONG PUT BUTTERFLY Vs MARRIED PUT - When & How to use ?
LONG PUT BUTTERFLY
MARRIED PUT
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 work when the investor goes long in any stock. He expects the rise in market in future.
Action
Buy 1 OTM Put, Sell 2 ATM Puts, Buy 1 ITM Put
Buy 250 XYZ Shares, Buy 1 ATM Put 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
Purchase Price of Underlying + Premium Paid
LONG PUT BUTTERFLY Vs MARRIED PUT - Risk & Reward
LONG PUT BUTTERFLY
MARRIED PUT
Maximum Profit Scenario
Strike Price of Higher Strike Long Put - Strike Price of Short Put - Net Premium Paid - Commissions Paid
Profit = Price of Underlying - Purchase Price of Underlying - Premium Paid
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
Max Loss = Premium Paid + Commissions Paid
Risk
Limited
Limited
Reward
Limited
Unlimited
LONG PUT BUTTERFLY Vs MARRIED PUT - Strategy Pros & Cons
LONG PUT BUTTERFLY
MARRIED PUT
Similar Strategies
Iron Condors, Iron Butterfly
Long Call
Disadvantage
• Risk is higher than reward. • When the underlying price is in between the two breakeven points, time decay hurts the position.
Cost of the put options eats into profit margin.
Advantages
• Limited maximum loss. • Unlimited profit potential, risk only limited to loss of premium. • Benefits from low volatility.
