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Short Put Butterfly
The short put butterfly is a neutral strategy like the long put butterfly but bullish on volatility. It is a limited profit, limited risk options strategy. There are 3 striking prices involved in a short put butterfly and it can be constructed by writing one lower striking outofthemoney put, buying two atthemoney puts and writing another higher striking inthemoney put, giving the options trader a net credit to put on the trade.
Short Put Butterfly Construction 
Sell 1 ITM Put Buy 2 ATM Puts Sell 1 OTM Put 
Limited Profit
Maximum profit is attained for the short put butterfly when the underlying stock price rally pass the higher strike price or drops below the lower strike price at expiration.
If the stock ends up at the higher striking price, all the put options expire worthless and the short put butterfly trader keeps the initial credit taken when entering the trade.
If, instead, the stock price at expiry is equal to the lower strike price, the lower striking put option expires worthless while the “profits” of the remaining long put is canceled out by the “loss” incurred from shorting the higher strike put. So the maximum profit is still only the initial credit taken.
The formula for calculating maximum profit is given below:
 Max Profit = Net Premium Received – Commissions Paid
 Max Profit Achieved When Price of Underlying = Strike Price of Higher Strike Short Put
Limited Risk
Maximum loss for the short put butterfly is incurred when the price of the underlying asset remains unchanged at expiration. At this price, only the higher striking put which was shorted expires inthemoney. The trader will have to buy back that put option at its intrinsic value to exit the trade.
The formula for calculating maximum loss is given below:
 Max Loss = Strike Price of Higher Strike Short Put – Strike Price of Long Put – Net Premium Received + Commissions Paid
 Max Loss Occurs When Price of Underlying = Strike Price of Long Put
Breakeven Point(s)
There are 2 breakeven points for the short put butterfly position. The breakeven points can be calculated using the following formulae.
 Upper Breakeven Point = Strike Price of Highest Strike Short Put – Net Premium Received
 Lower Breakeven Point = Strike Price of Lowest Strike Short Put + Net Premium Received
Example
Suppose XYZ stock is trading at $40 in June. An options trader executes a short put butterfly by writing a JUL 30 put for $100, buying two JUL 40 puts for $400 each and writing another JUL 50 put for $1100. The net credit taken to enter the position is $400, which is also his maximum possible profit.
On expiration in July, XYZ stock has dropped to $30. All the options expire worthless and the short put butterfly trader gets to keep the entire initial credit taken of $400 as profit. This is also the maximum profit attainable and is also obtained even if the stock had instead rallied to $50 or beyond.
On the downside, should the stock price remains at $40 at expiration, maximum loss will be incurred. At this price, all except the higher striking put expires worthless. The higher striking put sold short would have a value of $1000 and needs to be bought back to close the trade. Subtracting the initial credit of $400 taken, the net loss (maximum) is equal to $600.

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Note: While we have covered the use of this strategy with reference to stock options, the short put butterfly is equally applicable using ETF options, index options as well as options on futures.
Commissions
Commission charges can make a significant impact to overall profit or loss when implementing option spreads strategies. Their effect is even more pronounced for the short put butterfly as there are 4 legs involved in this trade compared to simpler strategies like the vertical spreads which have only 2 legs.
If you make multilegged options trades frequently, you should check out the brokerage firm OptionsHouse.com where they charge a low fee of only $0.15 per contract (+$4.95 per trade).
Similar Strategies
The following strategies are similar to the short put butterfly in that they are also high volatility strategies that have limited profit potential and limited risk.
Long Put Butterfly
The long put butterfly spread is a limited profit, limited risk options trading strategy that is taken when the options trader thinks that the underlying security will not rise or fall much by expiration.
Long Put Butterfly Construction 
Buy 1 OTM Put Sell 2 ATM Puts Buy 1 ITM Put 
There are 3 striking prices involved in a long put butterfly spread and it is constructed by buying one lower striking put, writing two atthemoney puts and buying another higher striking put for a net debit.
Limited Profit
Maximum gain for the long put butterfly is attained when the underlying stock price remains unchanged at expiration. At this price, only the highest striking put expires in the money.
The formula for calculating maximum profit is given below:
 Max Profit = Strike Price of Higher Strike Long Put – Strike Price of Short Put – Net Premium Paid – Commissions Paid
 Max Profit Achieved When Price of Underlying = Strike Price of Short Put
Limited Risk
Maximum loss for the long put butterfly is limited to the initial debit taken to enter the trade plus commissions.
The formula for calculating maximum loss is given below:
 Max Loss = Net Premium Paid + Commissions Paid
 Max Loss Occurs When Price of Underlying = Strike Price of Higher Strike Long Put
Breakeven Point(s)
There are 2 breakeven points for the long put butterfly position. The breakeven points can be calculated using the following formulae.
 Upper Breakeven Point = Strike Price of Highest Strike Long Put – Net Premium Paid
 Lower Breakeven Point = Strike Price of Lowest Strike Long Put + Net Premium Paid
Example
Suppose XYZ stock is trading at $40 in June. An options trader executes a long put butterfly by buying a JUL 30 put for $100, writing two JUL 40 puts for $400 each and buying another JUL 50 put for $1100. The net debit taken to enter the trade is $400, which is also his maximum possible loss.
On expiration in July, XYZ stock is still trading at $40. The JUL 40 puts and the JUL 30 put expire worthless while the JUL 50 put still has an intrinsic value of $1000. Subtracting the initial debit of $400, the resulting profit is $600, which is also the maximum profit attainable.
Maximum loss results when the stock is trading below $30 or above $50. At $50, all the options expires worthless. Below $30, any “profit” from the two long puts will be neutralised by the “loss” from the two short puts. In both situations, the long put butterfly trader suffers maximum loss which is equal to the initial debit taken to enter the trade.
Note: While we have covered the use of this strategy with reference to stock options, the long put butterfly is equally applicable using ETF options, index options as well as options on futures.
Commissions
Commission charges can make a significant impact to overall profit or loss when implementing option spreads strategies. Their effect is even more pronounced for the long put butterfly as there are 4 legs involved in this trade compared to simpler strategies like the vertical spreads which have only 2 legs.
If you make multilegged options trades frequently, you should check out the brokerage firm OptionsHouse.com where they charge a low fee of only $0.15 per contract (+$4.95 per trade).
Similar Strategies
The following strategies are similar to the long put butterfly in that they are also low volatility strategies that have limited profit potential and limited risk.
Butterfly Spread
What Is a Butterfly Spread?
A butterfly spread is an options strategy combining bull and bear spreads, with a fixed risk and capped profit. These spreads, involving either four calls or four puts are intended as a marketneutral strategy and pay off the most if the underlying does not move prior to option expiration.
Key Takeaways
 There are multiple butterfly spreads, all using four options.
 All butterfly spreads use three different strike prices.
 The upper and lower strike prices are equal distance from the middle, or atthemoney, strike price.
 Each type of butterfly has a maximum profit and a maximum loss.
Understanding Butterflies
Butterfly spreads use four option contracts with the same expiration but three different strike prices. A higher strike price, an atthemoney strike price, and a lower strike price. The options with the higher and lower strike prices are the same distance from the atthemoney options. If the atthemoney options have a strike price of $60, the upper and lower options should have strike prices equal dollar amounts above and below $60. At $55 and $65, for example, as these strikes are both $5 away from $60.
Puts or calls can be used for a butterfly spread. Combining the options in various ways will create different types of butterfly spreads, each designed to either profit from volatility or low volatility.
Long Call Butterfly
The long butterfly call spread is created by buying one inthemoney call option with a low strike price, writing two atthemoney call options, and buying one outofthemoney call option with a higher strike price. Net debt is created when entering the trade.
The maximum profit is achieved if the price of the underlying at expiration is the same as the written calls. The max profit is equal to the strike of the written option, less the strike of the lower call, premiums, and commissions paid. The maximum loss is the initial cost of the premiums paid, plus commissions.
Short Call Butterfly
The short butterfly spread is created by selling one inthemoney call option with a lower strike price, buying two atthemoney call options, and selling an outofthemoney call option at a higher strike price. A net credit is created when entering the position. This position maximizes its profit if the price of the underlying is above or the upper strike or below the lower strike at expiry.
The maximum profit is equal to the initial premium received, less the price of commissions. The maximum loss is the strike price of the bought call minus the lower strike price, less the premiums received.
Long Put Butterfly
The long put butterfly spread is created by buying one put with a lower strike price, selling two atthemoney puts, and buying a put with a higher strike price. Net debt is created when entering the position. Like the long call butterfly, this position has a maximum profit when the underlying stays at the strike price of the middle options.
The maximum profit is equal to the higher strike price minus the strike of the sold put, less the premium paid. The maximum loss of the trade is limited to the initial premiums and commissions paid.
Short Put Butterfly
The short put butterfly spread is created by writing one outofthemoney put option with a low strike price, buying two atthemoney puts, and writing an inthemoney put option at a higher strike price. This strategy realizes its maximum profit if the price of the underlying is above the upper strike or below the lower strike price at expiration.
The maximum profit for the strategy is the premiums received. The maximum loss is the higher strike price minus the strike of the bought put, less the premiums received.
Iron Butterfly
The iron butterfly spread is created by buying an outofthemoney put option with a lower strike price, writing an atthemoney put option, writing an atthemoney call option, and buying an outofthemoney call option with a higher strike price. The result is a trade with a net credit that’s best suited for lower volatility scenarios. The maximum profit occurs if the underlying stays at the middle strike price.
The maximum profit is the premiums received. The maximum loss is the strike price of the bought call minus the strike price of the written call, less the premiums received.
Reverse Iron Butterfly
The reverse iron butterfly spread is created by writing an outofthemoney put at a lower strike price, buying an atthemoney put, buying an atthemoney call, and writing an outofthemoney call at a higher strike price. This creates a net debit trade that’s best suited for highvolatility scenarios. Maximum profit occurs when the price of the underlying moves above or below the upper or lower strike prices.
The strategy’s risk is limited to the premium paid to attain the position. The maximum profit is the strike price of the written call minus the strike of the bought call, less the premiums paid.
Example of a Long Call Butterfly
An investor believes that Verizon stock, currently trading at $60 will not move significantly over the next several months. They choose to implement a long call butterfly spread to potentially profit if the price stays where it is.
An investor writes two call options on Verizon at a strike price of $60, and also buys two additional calls at $55 and $65.
In this scenario, an investor would make the maximum profit if Verizon stock is priced at $60 at expiration. If Verizon is below $55 at expiration, or above $65, the investor would realize their maximum loss, which would be the cost of buying the two wing call options (the higher and lower strike) reduced by the proceeds of selling the two middle strike options.
If the underlying asset is priced between $55 and $65, a loss or profit may occur. The amount of premium paid to enter the position is key. Assume that it costs $2.50 to enter the position. Based on that, if Verizon is priced anywhere below $60 minus $2.50, the position would experience a loss. The same holds true if the underlying asset were priced at $60 plus $2.50 at expiration. In this scenario, the position would profit if the underlying asset is priced anywhere between $57.50 and $62.50 at expiration.
This scenario does not include the cost of commissions, which can add up when trading multiple options.

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