Long Put Butterfly
Description
The 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 popular
because they offer a good risk/reward ratio, together with low cost. The long
options 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.
The Long Put Butterfly involves a low strike long put, two ATM short puts, and
an ITM long put. The resulting positionis 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
P/L Profile
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