Long Put Butterfly

Outlook: Neutral

Long Put Butterfly  -  Buy One lower strike put, sell two middle strike puts and buy one higher strike put.
     
Strategies...

•              Buy ONE lower Strike Put (OTM)
•              Sell TWO middle strike Puts (ATM) with same expiration.
•              Buy ONE higher Strike Put (ITM) 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.

McDonald's Corporation (NYSE:MCD), is traded at $85 on June, 2012. To do a long put butterfly.

• Buy July 2012 $80 Put at $0.45.
• Sell July 2012 $85 Put at $1.15.
• Buy July 2012 $90 Put at $3.25.

Long Put Butterfly

Long Put Butterfly

 Advantages...

•             Profit from little movement in the stock.
•             Low cost.

Disadvantages...

•             Narrow range for high profit.

Premium Paid:            $0.45 - ($1.15 x 2) + $3.25 = $1.40

Maximum Profit:         $5.00 - $1.40 = $3.60
                                  (Different in strike - net premium paid)

Maximum Loss:           Net Premium paid
                         
Breakeven Up:            $90.00 - $1.40 = $88.60
                                   (Higher Strike Price -  Premium paid)

Breakeven Down :       $80.00 + $1.40 = $81.40                            
                                   (Lower Strike Price + Premium paid)