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Long Put Butterfly
A Long Put Butterfly is a combination of buying a Put, selling 2 lower strike price Puts, and buying an even lower strike price Put, with the same width across all strikes.
Payoff Diagram:
Direction Assumption: Neutral if done with ATM short strikes, or Bearish if done with OTM short strikes.
Maximum Profit: Limited to lower Long Put strike minus Short Put strike, minus debit paid.
Maximum Loss: Limited to net debit paid.
Breakeven Price:
• On the lower end, lowest Long Put strike plus the net debit paid.
• On the higher end, highest Long Put strike minus the net debit paid.
Theta: Passage of Time -> Positive Effect
The net effect of time decay is positive. Should the underlying stays between the short strikes at expiration, all legs will decay to zero and expire worthless.
Volatility:
If Volatility decreases -> Positive Effect.
If Volatility increases -> Negative Effect.
Long Put Butterflies are Vega negative, meaning that if volatility increases, the position loses value.
