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Long Put Butterfly Option Strategy

Long Put Butterfly Option Strategy

What is Long Put Butterfly Option Strategy?

  • Long Put Butterfly Option Strategy is a non-directional strategy that offers decent reward/risk along with low cost. In Long Put Butterfly traders expect the market to remain range bound and volatile to be on the lower side. In scenarios where strike difference is not equal it is known as Modified Put Butterfly Spread.

When to Execute?

  • ong Put Butterfly can be executed when; When you are looking to execute a potentially high-yielding trade at a very low cost, where your maximum profit occurs if the stock is at the middle strike price at expiration. Ideal when one is anticipating very low volatility in the stock price.

What is the Trade?

  • Long Put Butterfly can be devised by Buying One lot In-the-Money (ITM) Put , selling 2 lots At-the-Money (ATM) Put and Buy 1 lot Out-of-Money (OTM) Put of the same underlying and expiration, while the difference between the strike price should be equal. Under modified put butterfly spread we can manipulate the difference between strike price to find a better risk reward scenario. Long Put Butterfly can be devised based on moderately bullish and bearish biasness by shifting the spread completely to the OTM or ITM side respectively.

Break-Even Point for Long Call Butterfly

  • There will be two breakeven in this Long Call Butterfly. Upper Breakeven = OTM Long PE – Net Premium Paid. Lower Breakeven = ITM Long PE + Net Premium Paid

What will be maximum profit?

  • Maximum Profit in this strategy if the market closes exactly at the strike price we have sold. Maximum reward is the difference between adjacent strike prices less the net debit. (Strikes are equidistant from each other).

What will be maximum loss?

  • Maximum loss will be if market closes below or above the OTM PE bought and ITM PE sold respectively, though loss is limited to net premium paid. It is Net debit Strategy. However Net cost to establish is very low.

What are the advantages?

  • Long Put Butterfly helps to participate in high yielding trade with relatively low cost. Being completely hedge one can hold on to the stock till expiry. Promising Reward to risk provides good odds to wins as stock has ample room to perform.

What are the disadvantages?

  • Time decay is generally harmful when stock is near first strike or third strike and beneficial if stock price is near middle strike. Maximum loss is capped. Strike selection is a key to garner maximum benefit.

Example for Long Put Butterfly:

  • Nifty future price is 15750. A Long-Put Butterfly can be devised by Selling two lot of 15750 PE (ATM) @ 260 and buying one lots of 15550 PE(OTM) at Rs. 190 and 15950 PE at 370 respectively. Net Premium Paid or Received = Rs. -40 Maximum profit will if market closes exactly at 15750, Max Loss if underlying above or below the upper or lower bought strike price i.e., 15550 and 15950