The long put butterfly spread is an options trading strategy. To be precise, it is a limited profit, limited risk options trading strategy that is taken when the options trader thinks that the underlying security will not rise or fall much by expiration. There are usually three striking prices involved in a long put butterfly. It is constructed by buying one lower striking put, writing two at-the-money puts and buying another higher striking put for a net debit.
Limited Profit
When the underlying stock price remains unchanged at expiration, maximum gain for the long put butterfly is attained. At this price, only the highest striking put expires in the money.
The formula for calculating maximum profit is given below:
- Max Profit = Strike Price of Higher Strike Long Put – Strike Price of Short Put – Net Premium Paid – Commissions Paid
- Max Profit Achieved When Price of Underlying = Strike Price of Short Put
Limited Risk
Maximum loss for the long put butterfly is limited to the initial debit taken to enter the trade plus commissions.
The formula for calculating maximum loss is given below:
- Max Loss = Net Premium Paid + Commissions Paid
- Max Loss Occurs When Price of Underlying <= Strike Price of Lower Strike Long Put OR Price of Underlying >= Strike Price of Higher Strike Long Put
