Option Strategies Details
Buy one OTM Put, sell two further OTM Puts, buy one even further OTM Put
1. Speculate on a precise decrease in price at expiration and flat to decreasing volatility
Flat
Down
Highest strike minus debit paid or lowest strike plus debit paid
Cost of the Long Put Butterfly
same as Max Contract Loss
Long Put Butterfly
Other names
You buy (long) one OTM Put, sell (short) two further OTM Puts, buy (long) one even further OTM Put
Description
A trader who forecasts a precise decrease to a certain price range and flat to decreasing volatility can buy a Long Put Butterfly. The trader pays a small debit for the whole position, called a premium.
Suppose stock XYZ is trading at $238. You forecast a decrease in XYZ price to between $230 and $210 with high confidence that it will be at $220 at the next monthly expiration, and you forecast no change to volatility.
You open a $230 / $220 / $210 Long Put Butterfly (buying the $230 Put, selling two (2) $220 Puts, and buying the $210 Put) for a $0.93 debit. Your breakeven prices at expiry are $229.07, the nearest long Put minus the debit, and $210.93, the farthest long Put plus the debit. Your max profit is $9.07, the distance from the "wing" to the "body" of the Long Put Butterfly, minus the debit paid. It is important to remember that this max profit occurs at expiry only, since most of the value of the Long Put Butterfly is realized as the sold Puts decay into expiration. Compared to other structures, the Long Put Butterfly is very rigid with respect to time, since if your target price is achieved much faster than expected, the resulting position profit will be underwhelming.