Long Put Butterfly
Components
Sell two ATM put options, buy one ITM put option and buy one OTM put option.
Risk / Reward
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.
Characteristics
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.
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