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.