Lecture no 42 long put butterfly
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The long put butterfly strategy involves buying one lower strike put, selling two middle strike puts, and buying one higher strike put, targeting range-bound stock performance with low costs. Its risk/reward ratio is attractive, but maximum gains are only realized if the stock price is at the middle strike at expiration. While it allows for potential profits with limited risk, it may be adversely affected by bid/ask spreads and requires careful management of positions.
![Context - Long Put Butterfly
Effect of Time Decay
Time decay is helpful to this position when it is profitable an
harmful when the position is unprofitable.
Time Period to Trade
Month or Less
Breakeven Down = [Lower Strike + Net Debit]
Breakeven Up = [Higher Strike - Net Debit]](https://image.slidesharecdn.com/lectureno42-longputbutterfly-200703114936/85/Lecture-no-42-long-put-butterfly-7-320.jpg)
Lecture no 42 long put butterfly
- 1. Lecture No 42 Long Put Butterfly Rohan Sharma (Coach)
- 2. Basics Concepts – Long Put Butterfly Proficiency - Intermediate Direction – Neutral Volatility - Low Asset Leg – Long put + Two Short puts + Long put Max Risk - Limited Max Reward - Limited Capital Gain Strategies
- 3. Description – Long Put Butterfly The Long Put Butterfly involves a low strike long puts , two ATM short puts, and an ITM long call. The resulting is profitable in the event of range bound 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. Long butterflies are quite popular because they offer a good risk/reward ratio, together with low cost.
- 4. Description – Long Put Butterfly Buy one lower strike (OTM) put. Sell two middle strike (ATM) puts. Buy one higher strike (ITM) put. All options share the same expiration date for this strategy. For this strategy, you must use all puts. Remember that there should be equal distance between each strike price. The maximum reward occurs if the stock is at the middle strike at expiration.
- 5. Context - Long Put Butterfly Outlook • With Long Put Butterfly, your outlook is direction neutral you expect very little movement in the stock price. Rationale With long butterflies, you are looking to execute a potentially high- yielding trade at very low cost, where your maximum profits occur if the stock finishes at the middle strike price at expiration. You are anticipating very low volatility in the stock price.
- 6. Context - Long Put Butterfly Net Position This is a net debit trade, although the net cost is typically low. Your maximum risk is the net debit of the bought and sold options. Your maximum reward is the difference between adjacent strike prices less the net debit.
- 7. Context - Long Put Butterfly Effect of Time Decay Time decay is helpful to this position when it is profitable an harmful when the position is unprofitable. Time Period to Trade Month or Less Breakeven Down = [Lower Strike + Net Debit] Breakeven Up = [Higher Strike - Net Debit]
- 8. Steps to Trading a Long Put Butterfly Steps In Try to ensure that the trend is range bound and identify clear areas of support and resistance. Try to ensure that no news is coming out soon for the stock. Steps Out Manage your position according to the rules defined in your Trading Plan. If the stock veers outside your stop loss areas above or below the stock price, then unravel the entire position. You can unravel the position just before expiration—remember to include all the commissions in your calculations.
- 9. Exiting the Trade - Long Put Butterfly Exiting the Position With this strategy, you can simply unravel the spread by buying back the options you sold and selling the options you bought in the first place. Advanced traders may leg up and down or only partially unravel the spread as the underlying asset fluctuates up and down. Mitigating a Loss Unravel the trade as described previously. Advanced traders may choose to only partially unravel the spread leg-by-leg and create alternative risk profiles.
- 10. Advantages and Disadvantages Advantages Profit from a range bound stock for very little cost. Capped and low risk. Comparatively high risk/reward ratio if the stock remains range bound. Disadvantages The higher profit potential comes with a narrow range between the wing strikes. The higher profit potential only comes nearer expiration. Bid/Ask Spread can adversely affect the quality of the trade.
- 11. Real Time Example Rohan Sharma (Coach)
- 12. Price Movement Position on Charts Rohan Sharma (Coach)
- 14. Example – Long Put Butterfly Market Behavior Nifty Option /Future 3 option pair Action (Long/ Short) Both (Long & Short) Price Movement Expectation Low Volatility Spot Price 11700 Strike Price (Long ITM Put) 11800 Premium 140 Strike Price ( 2 Short ATM Put) 11700 Premium 100 Strike Price (LONG OTM Put ) 11600 Premium 75 Break Even (Up) Higher Strike - Net Debit = (11800 + 15) = 11815 Breakeven (Down) Lower Strike + Net Debit = (11700 – 15) = 11685 Time to Expiry Last/Mid of the Month Position of Price in Charts Sideways Max Risk Limited Max Reward Limited
- 15. Long Put Butterfly LONG ITM PUT 11600 Premium 140 BEP 11460 2 SHORT ATM PUT 11700 Premium 100 BEP 11600 LONG OTM PUT 11800 Premium 75 BEP 11725 Nifty at Expiry LONG PUT BEP – 11460 2 SHORT PUT BEP – 11600 LONG PUT BEP – 11725 TOTAL P&L 12100 -140 200 -75 -15 11900 -140 200 -75 -15 11800 -140 200 -75 -15 11700 -140 200 25 85 11600 -140 - 125 -15 11500 -40 -200 225 -15 11400 60 -400 325 -15 11200 260 -800 525 -15 11000 460 -1200 725 -15