Long two ATM put options, short one ITM put option and short one OTM put option.
Maximum Loss: Limited to the net difference between the ATM strike less the ITM strike less the premium received for the position.
Maximum Gain: Limited to the net premium received for the option spread.
When to use: When you are bullish or bearish on market direction and bullish on volatility.
Short put butterfly's have the same characteristics as the Short Call Butterfly - the only difference is that we use put options instead of call options.
Short butterfly's are an excellent strategy if you expect the market to move, however, you are unsure about what direction the market will move. For example, say there is an announcement due regarding earnings or a Government figure to be released. You might be nervous about market activity and expecting a large move in either direction.
In these types of situations you might want to consider implementing a short butterfly strategy - even though your profits are limited they are inexpensive to establish therefore giving you a higher return on investment.
Sell two ATM put options, buy one ITM put option and buy one OTM put option.
Maximum Loss: Limited to the ATM strike less the ITM strike less the net premium paid for the spread.
Maximum Gain: Limited to the net premium received from the spread.
When to use: When you are neutral on market direction and bearish on volatility.
This strategy is the same as the Long Call Butterfly except we use put options instead of call options.
A Long Put Butterfly is used with similar intentions to the Short Straddle- except your losses are limited if the market moves out of your favour. Whereas a Short Straddle has unlimited losses if the market moves.
Long two ATM call options, short one ITM call option and short one OTM call option.
Maximum Loss: Limited to the net difference between the ATM strike less the ITM strike less the premium received for the position.
Maximum Gain: Limited to the net premium received for the option spread.
When to use: When you are neutral on market direction and bullish on volatility. Neutral on market direction meaning that you want the market to move in either direction - i.e. bullish and bearish at the same time.
Short Call Butterfly's have a similar pay off to the Short Straddle except the downside risk is limited. Short Straddles have unlimited downside risk: a Short Butterfly's risk is limited to the premium paid for the three options.
Butterfly's are three legged option combinations.
Short two ATM call options, long one ITM call option and long one OTM call option.
Maximum Loss: Limited to the ATM strike less the ITM strike less the net premium paid for the spread.
Maximum Gain: Limited to the net premium received from the spread.
When to use: When you are neutral on market direction and bearish on volatility.
A long butterfly is similar to a short straddle except your losses are limited. This means that you make money when the market remains flat over the life of the options.
You might be thinking that it looks like a "short" strategy because of the similarity to the short straddle. You are right in thinking that they have similar characteristics, however, the difference between a Long Butterfly and a Short Straddle is the premium - a Long Butterfly will cost you money (or premium) to establish whereas a Short Straddle won't cost you anything as you receive money (premium) up front for putting on the position.
Short two OTM put options and long one ITM put option.
Maximum Loss: Unlimited on the downside and limited to the net premium paid on the upside.
Maximum Gain: The difference between the two strike prices less the premium paid for the position.
When to use: When you are neutral on market direction and bearish on volatility.
Long one ITM call option and short two OTM call options.
Maximum Loss: Unlimited on the upside and limited on the downside.
Maximum Gain: Limited to the difference between the two strikes less the net premium paid.
When to use: When you are bearish on volatility and neutral on market direction.
Even though a Call Ratio Vertical Spread is the reverse of a Call Backspread, it is generally not referred to as being short a Call Backspread as a Call Ratio Spread requires up front payment and is hence a long strategy.
You will notice that it is very similar to a Short Strangle except the risk is limited on the downside.
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