Investment Type: Credit
Strike Prices: OTM for 1st leg, ATM/ITM for 2nd leg, ATM/ITM for 3rd leg, OTM for 4th leg.
Expiration Month: Same expiration months for all legs and should be current month
Composition: Buy lower strike Put + Sell middle strike Put + Sell same middle strike Call + Buy higher Call
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Long Iron Butterfly is the combination of Bull Put Spread and Bear Call Spread. Long Butterfly and Long Iron Butterfly has the same shape on their risk profile. The difference is that we will have a net credit with Long Iron Butterfly.
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Entry:
Investment @ Entry = (Premium of lower strike Put Leg x No of Contracts x 100 Shares) + (Premium of middle strike Put Leg x No of Contracts x 100 Shares) + (Premium of middle strike Call Leg x No of Contracts x 100 Shares) + (Premium of higher strike Call Leg x No of Contracts x 100 Shares) = $1,500 + ($4,250) + ($2,000) + $500 = Credit ($4250)
Breakeven Point Down = middle strike – Net Credit = $35.00 - $1.70 = $33.30
Exit: Best Case Scenario:
Profit @ Exit = (Premium of lower strike Put Leg x No of Contracts x 100 Shares) + (Premium of middle strike Put Leg x No of Contracts x 100 Shares) + (Premium of middle strike Call Leg x No of Contracts x 100 Shares) + (Premium of higher strike Call Leg x No of Contracts x 100 Shares) – Investment @ Entry = $0 + $0 + $0 + $0 + $4,250= $4,250
Return of Investment = Profit @ Exit / Investment @ Entry = 100%
Worst Case Scenario : (Difference between Strike Prices – Net credit) x No of Contracts
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