A long put butterfly is an options trading strategy that involves the use of multiple put options with three different strike prices. This strategy is designed to profit from a specific range of price movement in the underlying asset. It’s called a ‘butterfly’ because of the visual representation of the options’ payoff diagram resembling the wings of a butterfly.
The strategy’s maximum profit is attained if the asset price settles at the middle strike price at expiration. If the price falls below the lowest strike price or rises above the highest strike price, the strategy may result in a loss. The long put butterfly’s risk is capped, limiting potential losses to the initial cost of the options.
Traders deploy this strategy when they anticipate low volatility in the market or predict that the asset price will remain within a specific range until the options expire. It offers a limited risk-reward ratio, providing a higher probability of profit within a predetermined price range. However, if the underlying asset experiences significant movement beyond the set range, it may lead to losses.
To find out what is a short put butterfly click here. What is a short put butterfly?