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Bearish Butterfly Strategy

Strategy Type:

Moderately Bearish and Limited Profit

Components: The strategy involves two main components:

  • Short Put Option: The investor sells (writes) two out-of-the-money put options with a specific strike price (middle strike).
  • Long Put Option: Simultaneously, the investor buys one out-of-the-money put option with a lower strike price.

Profit and Loss Potential:

  • Maximum Profit:The maximum profit is limited and occurs if the underlying asset's price falls to the middle strike price (the strike price of the short puts) at expiration. The profit is capped at the difference between the middle strike and the lower strike, minus the net premium received from selling the short puts.
  • Maximum Loss:The maximum loss is limited and occurs if the underlying asset's price remains above the middle strike or falls below the lower strike. The loss is limited to the net premium received from selling the short puts.
Break-Even Point: There are two break-even points based on the specifics of the options used. The lower break-even point occurs if the underlying asset's price falls to the lower strike, and the upper break-even point occurs if the price rises above the middle strike.

Strategy Goals:

  • The primary goal of a Bearish Butterfly is to profit from a limited price decline in the underlying asset while keeping potential losses low.
  • The strategy is suitable when an investor has a moderately bearish outlook and expects the underlying asset's price to remain within a specific range.

Risk Management:

  • The risk is limited to the net premium received from selling the short put options. This defines the maximum loss.
  • The strategy offers limited profit potential.