The document outlines the modified put butterfly trading strategy, which consists of a long put at a low strike, two short puts at a middle strike, and a long put at a higher strike. This strategy is designed for a range-bound market with a bearish bias, allowing for limited risk and profit potential, particularly if the stock closes at the middle strike at expiration. It emphasizes selecting stocks with adequate liquidity, managing the position based on predefined rules, and factoring in the effects of time decay on profitability.

1. Lecture No 46
Modified Put Butterfly
Rohan Sharma (Coach)

2. Basics Concepts – Modified Put Butterfly
Proficiency - Expert
Direction – Bearish
Volatility - Low
Asset Leg –
Long put + 2 Short
puts + Long put
Max Risk - Limited
Max Reward -
Limited
Capital Gain
Strategies

3. Description – Modified Put Butterfly
 The Modified Put Butterfly is identical to the Long put Butterfly
with the exception that the distance between the middle and
Lower strike puts is closer than that of the higher and middle
strikes .
The net effect of this is that the position changes to a range
bound strategy with a bearish bias.
 The 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 range bound or
falling action by the stock.
 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.

4. Description – Modified Put Butterfly
Buy one lower strike (OTM) put.
Sell two middle strike (ATM) puts.
Buy one higher strike (ITM) put.
All options share the same expiration date for this strategy.
For this strategy, you must use all puts.
Remember that the distance between the lower and middle strikes is closer
than the distance between the higher and middle strikes.
The maximum reward occurs if the stock is at the middle strike at expiration.

5. Steps to Trading a Modified Put Butterfly
Steps In
Choose from stocks with adequate liquidity, preferably over 500,000 Average
Daily Volume (ADV).
Try to ensure that the trend is range bound and identify a clear area of
support.
•Steps Out
Manage your position according to the rules defined in your Trading Plan.
If the stock falls below your stop loss below the current stock price, then
unravel the entire position.
You can unravel the position just before expiration—remember to include all
the commissions in your calculations.

6. Context - Modified Put Butterfly
Outlook
With modified butterflies, your profile is direction neutral to
moderately bearish—you expect a moderate rise.
Rationale
With modified butterflies, you are looking to execute a potentially
high yielding trade at very low cost, where your maximum profits
occur if the stock finishes at the middle strike price at expiration.
You are anticipating moderately low volatility in the stock price.

7. Context - Modified Put Butterfly
Net Position
This is a net debit trade, although the net cost is
typically low.
Your maximum risk is the net debit of the bought and
sold options.
Your maximum reward is the difference between
adjacent strike prices less the net debit.

8. Context - Modified Put Butterfly
Effect of Time Decay
Time decay is helpful to this position when it is profitable and
harmful when the position is unprofitable.
When you enter the trade, typically the stock price will be in the
profitable area of the risk profile, so from that perspective, time
decay harms the position.
Time Period to Trade
Month or Less
Breakeven [Lower strike + max risk]

9. Exiting the Trade - Modified Put Butterfly
Exiting the Position
 With this strategy, you can simply unravel the spread by buying
back the options you sold and selling the options you bought in the
first place.
Advanced traders may leg up and down or only partially unravel the
spread as the underlying asset fluctuates up and down.
Mitigating a Loss
Unravel the trade as described previously.
Advanced traders may choose to only partially unravel the spread
leg-by-leg and create alternative risk profiles.

10. Advantages and Disadvantages
Advantages
Profit from a range bound stock for very little cost.
Capped and low risk.
Comparatively high risk/reward ratio if the stock remains range
bound.
Disadvantages
The higher profit potential comes with a narrow range between the
wing strikes.
The higher profit potential only comes nearer expiration.
Bid/Ask Spread can adversely affect the quality of the trade.

11. Real Time Example
Rohan Sharma (Coach)

12. Price Movement
Position on Charts
Rohan Sharma (Coach)

14. Example – Long Put Butterfly
Market Behavior Nifty
Option /Future 3 option pair
Action (Long/ Short) Both (Long & Short)
Price Movement Expectation Low Volatility
Spot Price 11700
Strike Price (Long ITM Put) 11800 Premium 140
Strike Price ( 2 Short ATM Put) 11700 Premium 100
Strike Price (LONG OTM Put ) 11600 Premium 75
Break Even (Up) Higher Strike - Net Debit = (11800 + 15) = 11815
Breakeven (Down) Lower Strike + Net Debit = (11700 – 15) = 11685
Time to Expiry Last/Mid of the Month
Position of Price in Charts Sideways
Max Risk Limited
Max Reward Limited

15. Long Put Butterfly
LONG ITM PUT 11600 Premium 140 BEP 11460
2 SHORT ATM PUT 11700 Premium 100 BEP 11600
LONG OTM PUT 11800 Premium 75 BEP 11725
Nifty at Expiry LONG PUT BEP –
11460
2 SHORT PUT BEP –
11600
LONG PUT BEP –
11725
TOTAL P&L
12100 -140 200 -75 -15
11900 -140 200 -75 -15
11800 -140 200 -75 -15
11700 -140 200 25 85
11600 -140 - 125 -15
11500 -40 -200 225 -15
11400 60 -400 325 -15
11200 260 -800 525 -15
11000 460 -1200 725 -15