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 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 Short Call + Net Premium Received, Lower Breakeven Point = Strike Price of Short Put - Net Premium Received
Purchase Price of Underlying + Premium Paid
IRON BUTTERFLY Vs MARRIED PUT - Risk & Reward
IRON BUTTERFLY
MARRIED PUT
Maximum Profit Scenario
Net Premium Received - Commissions Paid
Profit = Price of Underlying - Purchase Price of Underlying - Premium Paid
Maximum Loss Scenario
Strike Price of Long Call - Strike Price of Short Call - Net Premium Received + Commissions Paid
Max Loss = Premium Paid + Commissions Paid
Risk
Limited
Limited
Reward
Limited
Unlimited
IRON BUTTERFLY Vs MARRIED PUT - Strategy Pros & Cons
IRON BUTTERFLY
MARRIED PUT
Similar Strategies
Long Put Butterfly, Neutral Calendar Spread
Long Call
Disadvantage
• Large commissions involved. • Probability of losses are higher.
Cost of the put options eats into profit margin.
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.
