Long Put Butterfly (Sell 2 ATM Put + Buy 1 ITM Put + Buy 1 OTM Put)

Long Put Butterfly (Sell 2 ATM Put + Buy 1 ITM Put + Buy 1 OTM Put)

A Long Put Butterfly is to be adopted when the investor is expecting very little movement in the stock price / index. The investor is looking to gain from low volatility at a low cost. The strategy offers a good risk / reward ratio, together with low cost. The strategy can be done by selling 2 ATM Puts, buying 1 ITM Put, and buying 1 OTM Put options.

Market Scenario: When the investor is neutral on market direction and bearish on volatility.

Risk: Net premium paid

Reward: Limited (Difference between adjacent strikes - net debit)

BEP:   Upper BEP = Strike Price of Higher Strike Long Put – Net Premium Paid

            Lower BEP = Strike Price of Lower Strike Long Put + Net Premium Paid

EXAMPLE:
Entry:

SPOT

5000

	STRIKE	PREMIUM
BUY 1 ITM PUT	5100	224
SELL 2 ATM PUT	5000	168*2 = 336
BUY 1 OTM PUT	4900	121

UPPER BEP: 5100 - 9 = 5091                                               LOWER BEP: 4900 + 9 = 4909

On Exit if:

SPOT	ITM PUT	ATM PUT	OTM PUT	STRATEGY PAY-OFF
4700	176	-264	79	-9
4800	76	-64	-21	-9
4900	-24	136	-121	-9
4909	-33	154	-121	0
5000	-124	336	-121	91
5091	-215	336	-121	0
5100	-224	336	-121	-9
5200	-224	336	-121	-9
5300	-224	336	-121	-9

Long Put Butterfly - Strategy Pay-Off