Modified Put Butterfly is identical to the Long Put Butterfly with the
exception that the distance between the middle and higher strike calls is
closer than that of the lower and middle strikes.
net effect of this is that the position changes to a rangebound strategy with a
bullish bias. As such, we make our biggest profits if the stock remains around
the middle strike, but we can still make a profit if the stock breaks to the
is a fiddly strategy and should only be used if you have an analyzer handy
otherwise, it would be easy to miscalculate your risk profile. But in terms of
its usefulness, the Modified Butterfly is extremely useful for butterfly
enthusiasts who need some flexibility.
Modified Put Butterfly involves a low strike long put, two ATM short puts, and
an OTM long put. The resulting position is profitable in the event of
rangebound or rising action by the stock. Although the risk/reward ratio is
attractive, the problem remains that the maximum reward is restricted to the
scenario where the stock is at the middle strike at expiration.
to moderately bullish.
when you are expecting low volatility in the stock movement. You expect to
receive a high yield from investing very little capital.
is trading t $50.00 on May 9, 2011.
the June 2011 45 strike put for $0.98.
two June 2011 55 strike puts at $6.12.
the June 2011 60 strike put for $10.28.
very little cost, profit from sideways to rising stock.
risk is the difference between the low and middle strikes minus the difference
between the middle and high strike plus net debit or minus net credit. There is
a high risk compared to reward when the stock stays rangebound. The reward is
the difference between the middle and high strikes plus the net credit or minus
the net debit.
minus middle strike price plus net credit.
minus low strike plus net credit.
strike plus maximum risk.
Of Time Decay
when the position is profitable, negative when unprofitable.
stock drops under the stop loss below the current stock price, you can close
out the position.
out the position by buying back the options sold and selling the options