This strategy is implemented by buying 1 Put Option i.e. a single position, when the person is bearish on the market and expects the market to move downwards in the near future.
Risk: The maximum loss will be the premium amount paid.<
This strategy is opposite of the Long Call Butterfly Strategy, a trader expects the market to remain range bound in Long Call Butterfly, but here he expects the market to move beyond strike boundaries in Short Call Butterfly. If the trader is bullish on the market’s volatility, he will implement this strategy. Here also there should be equal distance between the ..
Lower Break-even = Lower Strike Price + Net Premium, Upper Break-even = Higher Strike Price - Net Premium
LONG PUT Vs SHORT CALL BUTTERFLY - When & How to use ?
LONG PUT
SHORT CALL BUTTERFLY
Market View
Bearish
Neutral
When to use?
A long put option strategy works well when you're expecting the underlying asset to sharply decline or be volatile in near future.
This strategy is meant for special scenarios where you foresee a lot of volatility in the market due to election results, budget, policy change, annual result announcements etc.
Action
Buy Put Option
Buy 2 ATM Call, Sell 1 ITM Call, Sell 1 OTM Call
Breakeven Point
Strike Price of Long Put - Premium Paid
Lower Break-even = Lower Strike Price + Net Premium, Upper Break-even = Higher Strike Price - Net Premium
LONG PUT Vs SHORT CALL BUTTERFLY - Risk & Reward
LONG PUT
SHORT CALL BUTTERFLY
Maximum Profit Scenario
Profit = Strike Price of Long Put - Premium Paid
The profit is limited to the net premium received.
Maximum Loss Scenario
Max Loss = Premium Paid + Commissions Paid
Higher strike price- Lower Strike Price - Net Premium
Risk
Limited
Limited
Reward
Unlimited
Limited
LONG PUT Vs SHORT CALL BUTTERFLY - Strategy Pros & Cons
LONG PUT
SHORT CALL BUTTERFLY
Similar Strategies
Protective Call, Short Put
Long Straddle, Long Call Butterfly
Disadvantage
• 100% loss if strike price, expiration dates or underlying stocks are badly chosen. • Time decay.
• Limited rewards, usually offer smaller return. • Profitability depends on the significant movement of stocks and options prices.
Advantages
• Limited risk to the premium paid. • Less capital investment and more profit. • Unlimited profit potential with limited risk.
• Even if the market is highly volatile, the risk exposure remains limited. • Without any extra investment, you can receive your premium. • Able to book profits even when the price movement cannot be predicted.
