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.
This Strategy is implemented when the investor requires downside protection for the short - to medium term but at lower cost. Buying protective puts can be an expensive proposition and writing OTM calls can defray the cost of the puts quite substantially. Protective Collar is considered as bearish to neutral strategy. In this strategy risk and reward is both are limited. This ..
Upper Breakeven Point = Strike Price of Short Call + Net Premium Received, Lower Breakeven Point = Strike Price of Short Put - Net Premium Received
Purchase Price of Underlying + Net Premium Paid
IRON BUTTERFLY Vs PROTECTIVE COLLAR - Risk & Reward
IRON BUTTERFLY
PROTECTIVE COLLAR
Maximum Profit Scenario
Net Premium Received - Commissions Paid
• Call strike - stock purchase price - net premium paid + net credit received
Maximum Loss Scenario
Strike Price of Long Call - Strike Price of Short Call - Net Premium Received + Commissions Paid
• Stock purchase price - put strike - net premium paid - put strike + net credit received
Risk
Limited
Limited
Reward
Limited
Limited
IRON BUTTERFLY Vs PROTECTIVE COLLAR - Strategy Pros & Cons
IRON BUTTERFLY
PROTECTIVE COLLAR
Similar Strategies
Long Put Butterfly, Neutral Calendar Spread
Bull Put Spread, Bull Call Spread
Disadvantage
• Large commissions involved. • Probability of losses are higher.
• Potential profit is lower or limited.
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.
