← Strategy LabLesson 34 · 4:43
Long put butterfly
Summary
The long put butterfly uses puts alone, buying one above the price, selling two at the price and buying one below, to bet XYZ ends close to where it is. At the same strikes it gives the same tent as the call butterfly: you pay $113, can make $387 if XYZ ends at exactly $100, and can never lose more than the $113. You break even at $96.13 and $103.87.
Key terms
- long put butterfly
- Buying one put above the price, selling two at the price and buying one below it, to pay a small amount for a bet the stock ends near the middle strike.
- put-call parity
- The rule that a call minus a put at one strike equals the stock minus the strike's value today, less expected dividends.
- net debit
- When a pair of trades sends cash out overall.
- tent shape
- early assignment
- Being assigned before the end date, which can happen on any day with American-style options.
Check yourself
Answer each question to see why the right answer is right.
1. How much does the lesson's long put butterfly cost, net, compared with the call butterfly at the same strikes?
2. XYZ ends at $100 on the last day. Which put gives you the gain?
3. XYZ ends at $90 on the last day. What is your result?
4. XYZ sits at $95 and the days pass with nothing else changing. What does time do to your result?
5. What one thing does change when you build the butterfly with puts instead of calls?
Finished the video and the quiz? .