What is Long Put Butterfly Option Strategy?

• A Long-Put Butterfly is a non-directional options trading strategy that involves buying one in-the- money put option, writing two at-the-money put options, and buying another out-of-the-money put option, all with the same expiration date. The goal of this strategy is to profit from a decrease in the price of the underlying asset, while limiting potential losses. This option trading strategy is considered to be a limited-risk, limited-reward strategy, because the potential profit is capped, while the potential loss is limited to the cost of the options.

When to Execute Long Put Butterfly Options?

• A Long Put Butterfly is generally considered to be a non-directional options trading strategy, which means that it is not dependent on the direction of the underlying asset's price movement. The strategy aims to profit from a neutral market, where the underlying asset's price is expected to stay within a certain range.

What is the Trade?

• A Long Put Butterfly Options can be created by buying one in-the-money put option, writing two at-the-money put options, and buying another out-of-the-money put option, all with the same expiration date.

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?

• The maximum profit for a Long-Put Butterfly is achieved when the price of the underlying asset is at the strike price of the at-the-money put options at expiration. The formula for calculating the maximum profit for this strategy is as follows:
  
  Maximum Profit = Net Premium Received - Cost of the Options Buying
  
  Where:
  
  Net Premium Received = Premium Received from Writing the At-the-Money Put Options - Premium Paid for Buying the In-the-Money and Out-of-the-Money Put Options
  
  It's important to keep in mind that the profit is limited to the net premium received, meaning that the potential profit is capped. Also, the potential loss is limited to the cost of the options.

What will be maximum loss?

• The maximum loss for a Long Put Butterfly occurs when the price of the underlying asset is below the strike price of the out-of-the-money put option or above the strike price of the in-the-money put option trading at expiration. The formula for calculating the maximum loss for this option trading strategy is the cost of the options, which is the net debit paid for the options, also known as the initial outlay. The maximum loss is equal to the net debit or the initial cost of the options and is limited to that amount.

What is the advantage of long Put Butterfly?

• There are several advantages to using a Long-Put Butterfly strategy:
  
  Limited Risk: The maximum loss for a Long-Put Butterfly Spread is limited to the cost of the options, which is the net debit paid for the options, also known as the initial outlay. This makes it a relatively low-risk strategy.
  
  Profit potential in a neutral market: The strategy allows an investor to potentially profit when the market is neutral, and the underlying asset's price is close to the middle strike price at expiration.
  
  Leverage: Options trading strategies such as the long iron butterfly allow investors to gain exposure to the underlying asset with a relatively small investment.
  
  Income generation: By selling the middle strike call or put options, an investor may generate income through the premium received.

What is the disadvantage of Long put Butterfly?

• Long put Butterfly Spread has limited profit potential and can be executed only in neutral market conditions.

Example for Long Put Butterfly:

• Let's say the current Nifty index level is at 17,650 and the trader believes that the index will not move much in the near future.
  
  The trader could enter into a Long Put Butterfly by taking the following actions:
  
  Buy 1 Nifty 17,300 put option at a premium of Rs. 60
  
  Sell 2 Nifty 17,650 put options at a premium of Rs. 200
  
  Buy 1 Nifty 18,000 put option at a premium of Rs. 400
  
  If at expiration, Nifty closes at 17,650, and the trader would gain the Rs. 210 as net premium received.
  
  If at expiration, Nifty closes at or 18000, all the option trading would expire worthless. The loss would be Rs. 60.
  
  If at expiration, Nifty closes at or below 17300, the net loss will be again limited to Rs.60