Name: Inverse Broken Wing Butterfly w/ Puts
Setup: Sell (short) Strike A put and Buy (long) 2 Strike C puts and Sell (short) Strike D put
Bias: Extremely Bearish
Break-Even: Two break-even points:
- Strike D – Credit received
- Strike B + Credit received
Max Profit: Limited: Strike B – Strike A + Credit received
Max Loss: Limited: Strike D – Strike C – Credit received
Margin: Difference between prices of the short put spread
Time Decay: Time decay works both ways in this play depending on where the underlying is currently trading. It will be your friend if the underlying is trading below Strike B or above Strike D. At these levels you want the calls to drop in value to capture your profit. If the underlying is trading around Strike C time decay becomes your enemy. At this level you will receive the max loss.
Implied Volatility: Again volatility works in two ways on this play. If the underlying is trading around Strike D or Strike B then you want it to decrease to increase the overall value of the position. If the underlying is trading around Strike C then you want implied volatility to increase for two reasons. First it will raise the value of your Strike C options plus it will hint at a strong move in either direction.
Notes: None at this time
Featured in Trade Review: None at this time