Long Put Butterfly is another rangebound strategy and is the opposite of a
Short Put Butterfly, which is a volatility strategy. Long butterflies are quite
they offer a good risk/reward ratio, together with low cost. The long
at the outside strikes ensure that the risk is capped on both sides, and this
is a much more conservative strategy than the Short Straddle.
Long Put Butterfly involves a low strike long put, two ATM short puts, and an
ITM long put. The resulting position is profitable in the event of rangebound
action by the stock. Although the risk/reward ratio is attractive, the problem
is that the maximum reward is restricted to the scenario where the stock is at
the middle strike at expiration.
neutral. You expect little movement in the stock price.
this sideways strategy for capital gain, when you want to accomplish this a low
cost and where maximum profits occur when the stock finishes at the middle
strike at expiration.
is trading at $50 on May 14, 2011.
June 2011 45 strike put for $0.98.
two June 2011 50 strike puts at $2.91.
debit: premiums bought minus premiums sold: $1.28.
benefit here is that you can realize a capital gain for little cost and capped
risk is the net debit of the sold and bought options. The reward is the
difference between adjacent strike prices minus the net debit.
between adjacent strikes minus net debit.
even up: higher strike minus net debit.
even down: lower strike plus net debit.
volatility is needed for this position.
Of Time Decay
when the position is profitable, negative when not profitable.
the stock moves outside of your stop loss, below or above the stock price,
close out the position.
before expiration, close out the position.