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How to buy an insurance and protect in the stock market correction with maximum profit potential?

Setup IWM Long Put Butterfly for Pullback or Hedge. 

This post is to understand how we can implement a decent size hedge with maximum profit potential with minimal investment. In this post I am explaining using only one unit, number of units can be increased based on the risk profile of the individual. 

To me it is the best strategy if we think market is going to have a correction within 30 days. 

As we all know IWM is Russell 2000 ETF that tracks the growth companies we are using IWM etf for the hedge expecting to fall at least 4% where we will exit our trade grabbing max profit from the trade.

So lets start with the strategy.

  1. Start with at least 45 days out options chain. 
  2. Sell 2 OTM Put option with delta (-.30 or around).
  3. Go 6 points down and buy 2 OTM put option
  4. Go 6 points up from the sold put buy 2 OTM put option. 

This will create a butterfly which will have highest profit potential in case IWM pulls back to Short 2 OTM put strike price. 

Lets see below visually (Today’s date is: 6 June 2021)

IWM current price is @ 227.40

Option Date Selected :  Jul 23 (47 days out) 

1 BTO 212.5 P @ $2.78

-2 STO 218 P @3.82

-1 BTO 224 P @5.70 

Cost for the Transaction = $0.66 ie. $66 

Max Profit = $534 @ Strike price of 218

Max Risk = $66 @ above $224    (Risk reward of 1:12) 

IWM butterfly



Note:- This post is just for my record and education purposes only and it is not at all any financial advice and I do not recommend implementing any of these advices on your own investments without consulting any professional financial advisor. 

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