When you expect the price of the underlying asset to fluctuate greatly for some time to come, but don't know if it will rise or fall, you can buy an Long Iron Butterfly.

How to build

● Sell 1 copy of Call 1

● Buy 1 copy of Call 2

● Buy 1 copy of Put 1

● Sell 1 copy of Put 2

The underlying assets, quantity, and expiration dates of Call 1, Call 2, Put 2 are the same. The differences are:

Exercise price: Call 1>Call 2=Put 1>Put 2, and Call 1-Call 2=Put 1-Put 2;

Strategy brief

The Long Iron Butterfly strategy is an options strategy with limited return and risk.

When the stock price is above the high break-even point or less than the low break-even point, the strategy yields positive returns.

When the price of the underlying asset fluctuates between a high break-even point and a low break-even point, the strategy makes a loss, but the loss is limited.

The Long Iron Butterfly is a four-legged strategy, so it also has two major characteristics of a multi-legged strategy:

First, transaction costs are relatively high, so you need to pay attention to processing fees.

Second, after establishing a strategy, it is possible to split legs flexibly according to the actual trend of the underlying asset.

First, if you separate the trade call and trade put parts, this strategy is actually a combination of a bullish call option spread and a bear put option spread.

In actual trading, investors can directly open positions to establish this strategy, or they can first establish a bullish bullish option spread near the support price, wait for the asset to rebound, and then establish a Long Iron Butterfly

If at the time of opening a position, the target is close to the pressure level, you can also first establish a bearish put option spread, wait for the underlying price to fall, and then establish a bullish bullish option spread, thus forming a buying iron butterfly price spread.

Furthermore, if you only look at the middle part of this strategy, you actually buy a cross-modal combination, plus a transaction where both ends sell options, which actually reduces the cost of holding a cross-modal combination. At the same time, this strategy also limits the room for maximum profit.

If you only look at the two ends of the sale transaction, you will also find that this is a broad selling strategy. Coupled with options trading bought in the middle, it limits the risk of both ends selling options. At the same time, it limits the price range of the underlying asset for maximum return and profit.

Finally, looking at the break-even chart, you can also find that this strategy is similar to Long Iron Butterfly. The differences are:

First, butterfly spreads can only be constructed using one type of option (Call or Put).

Second, the selling butterfly strategy usually has positive cash flow at the beginning of opening a position, while the cash flow at the beginning of opening a position with an iron butterfly spread is often negative. This is the biggest difference between the two.

This difference makes these two strategies both take different risks and respond to different situations in the trading process.

Risks and benefits

● Break-even point

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

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

● Maximum profit

High exercise price - intermediate exercise 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 expect the asset price to fluctuate greatly in the future, but you are unsure whether it will rise or fall sharply, so you have created a Long Iron Butterfly strategy:

Sell 1 Call for an exercise price of 56 US dollars, and the price is 2 US dollars;

The purchase price for 1 copy is 52 US dollars, and the price is 3 US dollars for Call;

The purchase price is 52 US dollars for 1 put, and the price is 2 US dollars;

Sell 1 Put at an exercise price of $48 and the price is $1.5.

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.