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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