If you think the stock price won't change much in the future, and if you want to profit from trading options while the risk is manageable, you can use long put butterfly.

How to build

long put butterfly consists of three options trades

● Buy 1 copy of put1

● Sell 2 copies of put2

● Buy 1 copy of put3

The underlying assets and expiration dates of Put1, Put2, and Put3 are all the same. The differences are:

Exercise price: put1

Number of open positions: put1: put2: put3 = 1:2:1

Strategy introduction

Buying a  long put butterfly is generally to buy 1 real option put3 with a higher strike price, sell 2 parity options put2 with an intermediate strike price, and buy 1 imaginary option with a lower strike price put1. The price difference between the three strike prices is equal, and the expiration date is the same.

If you take this combination apart, it's actually a combination of a  long put butterfly and a  long call butterfly. Buying put3 and selling 1 put2 is a bearish put option price difference; selling 1 put2 and buying put1 is a bull market put option price difference.

Generally, when buying a  long put butterfly strategy, the premium amount spent on buying put1 and put3 when opening a position will be higher than the premium income from selling 2 copies of PUT2, so at the beginning of strategy construction, the strategy showed a net outflow on the book.

Like the combination of bear market and  long call butterflys, buying a  long put butterfly is also a strategy with limited risk and return. The maximum profit and maximum loss of the strategy can be calculated when opening a position.

When the stock price is higher than the highest exercise price or lower than the minimum exercise price, the strategy makes the biggest loss; when the stock price is equal to the median exercise price, the strategy gains the most profit.

When analyzing this combination of strategies, we are still starting from the construction motivations.

Selling 2 put options is the main part of this strategy to achieve profits under the expectation that “there will be no major change in stock prices”.

Buying a put option on both sides is used to hedge against the risk of selling a put option, while also setting a more accurate profit range for the stock price.

Overall, this strategy is suitable for investors who have a high degree of confidence in the upper and lower limits of stock price fluctuations, and at the same time are risk-averse.

Finally, since the butterfly  long put butterfly is a four-legged strategy, the transaction cost of this strategy is high, and investors should pay special attention to costs when using it.

Risks and benefits

● Break-even point

Low break-even point: stock price = low exercise price - net option premium

High break-even point: stock price = high exercise price+net option premium

● Maximum profit

Maximum return = higher equity price - BOC price+net option premium

● Maximum loss

Net option premium

Examples of calculations

Assuming that in the US stock market, TUTU's current stock price is 52 US dollars. You think TUTU's stock price will still be around 52 US dollars in the next month, so you can use the butterfly strategy of buying put options.

Buy 1 put with an exercise price of 48 US dollars at a price of 2 US dollars;

Sell 2 puts with an exercise price of 52 US dollars at a price of 3 US dollars;

Buy 1 put with an exercise price of 56 US dollars at a price of 6 US dollars;

At maturity, your earnings will be as follows:

Explanation:

1. The article uses stocks as option targets to explain strategies. The actual investment bid can also be stock indices, futures contracts, bonds, currencies, etc.;

2. Unless otherwise specified, all options in this article refer to on-market options;

3. The TUTU company in the article is a virtual company;

4. The relevant calculations in this article do not take into account handling fees. In actual options investment, investors need to consider transaction costs.