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Butterfly Spread with Puts Option Strategy

Butterfly Spread with Puts Option Strategy : The trader opens the stock that comes close to the pinning strike price. It has a low cost to reduce risk if things take a turn for worse. It is best to use a low volatile market where the price has a high probability of pinning. The puts have the same expiration date and strike price that is equidistant. They are forecast because long from time decay also the net price of a butterfly spread falls when volatility rises/falls. The potential profit is high in percentage and risk is limited to the cost of the position including commission. The success is to buy the butterfly spread that requires a stock price stay between the lower and upper strike prices. The long butterfly spread will not rise in value and will not show a profit until it is close to expiration. The short straddle begins to show some profit in the expiration cycle as long as the stock price that doesn't move out of profit range. The iron butterfly spread is created by buying a money put option with a lower strike price and writing it. The reverse iron butterfly spread is created by writing money put at a lower strike price, buying it and writing out money calls at a high strike price. They will create a net debit trade that is best suited for high volatility.

Maximum profit/loss

The maximum profit is calculated by taking the difference between the higher strike price and middle strike price then subtracting the cost of a trade.

Breakeven

When there are two points then the upper breakeven would calculate by the highest strike and subtract the cost of a trade. The lower breakeven point is calculated by taking the lowest strike price and then adding net debit.

Example

If the ABC is trading $100 and expected to trade flat lower next 45 days and a trader could execute a 100/105/110 spread with put by buying one 110 prices put, selling 105 strike price and buy 100-strike price puts as buy 1 XYZ 110 strike price put for $5.00.Then Sell 2 XYZ 105-strike price puts for $5.40.we buy 1 XYZ 100-strike price put for $1.10, total cost = $0.70 debit

Conclusion

The lower trader set strike price is a more bearish butterfly with puts and becomes time reducing the cost of a trade. The lower the strike price is set lower the probability of success. The net price spread will drop when implied volatility rises and price increase when implied volatility fall and has an inverse relationship to imply volatility change. The trader executes the trade drop to implied volatility. The long butterfly spread is not a strategy for a beginner as it is useful for experienced options traders.