Long Put Butterfly Spread

Understanding the Long Put Butterfly Spread

The Long Put Butterfly Spread is a complex but crucial options strategy that traders often use in the cryptocurrency market. It is especially useful when a trader forecasts minimal movement in the price of the underlying asset.

Components of a Long Put Butterfly Spread

In its basic form, a Long Put Butterfly Spread combines three option contracts with identical expiry dates but different strike prices. It consists of one buying put option at a higher strike price, two selling put options at a middle strike price and one buying put option at a lower strike price.

Expectations and Profitability

Traders use the Long Put Butterfly Spread in scenarios when they expect the price of the underlying cryptocurrency to remain stable. When the price falls within the two middle strike prices at the options’ expiry, the trader makes a profit. Profit potential here is restricted but so is the risk, making this strategy fairly appealing.

Understanding Risk and Reward

The risk in the Long Put Butterfly Spread strategy is limited to the net premium paid at the onset. On the other hand, the maximum profit is the difference between the middle strike price and the higher strike price, minus the premium paid. If the price of the underlying asset moves significantly away from the strike prices, all options will be out-of-the-money, leading to the maximum possible loss.

Long Put Butterfly Spread in Cryptocurrency Market

This strategy can prove effectively useful when trading Bitcoin options, Ethereum options, or any other cryptocurrency options. However, while the Long Put Butterfly Spread might control risk, it also requires skillful handling. Therefore, this strategy is generally pursued by intermediate to advanced traders.