Outlook: Neutral
Long Iron Butterfly - Buy one lower strike put, sell one middle strike put, sell one middle strike call and buy one higher strike call.
Strategies...
- Buy ONE lower Strike Put (OTM)
- Sell ONE middle Strike Put (ATM) with same expiration.
- Sell ONE middle Strike Call (ATM) with same expiration.
- Buy ONE higher Strike Call (OTM) with same expiration.
- Seeking for little movement in the stock
- Maximum profit if the the stock at middle strike price.
- Preferably options with one month or less to expiration.
Yum! Brands, Inc.(NYSE:YUM), is traded at $65 on June, 2012. To do a Long Iron butterfly.
- Buy July 2012 $60 Put at $1.20.
- Sell July 2012 $65 Put at $2.70.
- Sell July 2012 $65 Call at $3.00.
- Buy July 2012 $70 Call at $0.95.
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| Long Iron Butterfly |
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| Long Iron Butterfly |
- Profit from little movement in the stock.
- No cost and low downside risk.
Disadvantages...
- Narrow range for high profit.
Premium Gain: $2.70 + $3.00 - $1.20 - $0.95 = $3.55
Maximum Profit: Premium gain
Maximum Loss: $5.00 - $3.55 = $1.45
(Different in strike - premium gain)
Breakeven Up: $65.00 + $3.55 = $68.55
(Middle Strike Price + Premium gain)
Breakeven Down : $65.00 - $3.55 = $61.45
(Middle Strike Price - Premium gain)
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