Short Put Butterfly Options Strategy

Submitted by admin on Thu, 11/25/2021 - 23:09

This technique earns money if the underlying stock is outside the butterfly's wings at expiration.


A short put butterfly is formed by purchasing two puts at a middle strike and selling one put at each of the lower and upper strikes.
Upper and lower strikes (wings) must be equally spaced apart from the center strike (body), and all options must have the same expiration date.


The investor is hoping that the underlying stock is not in the wings at the time of option expiration.


This technique earns money if the underlying stock is outside the butterfly's wings at expiration.



  • Short 1 AAPL 165 put
  • Long 2 AAPL 160 puts
  • Short 1 AAPL 155 put



Received a net premium


Net premium earned for high strike vs. medium strike


To profit from a change in the underlying or an increase in implied volatility throughout the option's life.


The short call butterfly and the short put butterfly will have the same reward at expiry, assuming the identical strikes and expiration.

They may, however, differ in terms of their chance of being exercised early if the options expire in the money or the underlying stock pays a dividend.
While they both have comparable risk/reward profiles, this strategy varies from the long iron butterfly in that the positive cash flow comes immediately and any negative cash flow is unpredictable and would occur in the future.

Maximum Loss

The largest loss would occur if the underlying stock were to expire at the middle strike.
In such situation, the short put with the higher strike would be in the money, while the remaining options would expire worthless.
The loss would be the difference between the top and middle strikes (the wing and the body), less any premium for beginning the position.

Maximum Gain

The biggest profit would be realized if the underlying stock was not in the wings at expiry.
If the stock is above the upper strike, all options expire worthless; if the stock is below the lower strike, all options are exercised and cancel each other out for a profit of zero.
In either situation, the investor retains the premium earned on the position's initiation.


Profit and loss are both quite restricted.
In essence, a butterfly's value during expiration ranges between zero and the distance between either wing and the body.
When an investor sells a butterfly, he or she obtains a premium between the minimum and maximum values and gains if the butterfly's value decreases as expiration approaches.


The strategy is profitable if the underlying stock is above or below the lower strike by the amount of premium received to begin the position at expiration.


In most cases, a rise in implied volatility will have a minor positive effect on this approach.

Time Deterioration

Time, on average, will have a negative effect on this technique if the butterfly's body is at the money, and a favorable effect if the butterfly's body is away from the money.

Assignment Danger

The short puts that constitute the butterfly's wings are exercisable at any time, whereas the investor choose when and if to execute the body.
The components of this position work in unison, and any early exercise might have a significant impact on the approach.
Due to the fact that the cost of carry can occasionally make it more advantageous to exercise a put option early, investors utilizing this method should exercise great caution if the butterfly goes into the money.

Additionally, bear in mind that a circumstance in which a stock is involved in a restructuring or capitalization event, such as a merger, takeover, spin-off, or special dividend, may radically deviate from usual expectations for early exercise of stock options.

Risk of Expiration

This strategy is subject to expiry.
If the stock is trading directly above or below either wing at expiry, the investor is unclear whether they will be assigned to that wing.
If the stock is approaching the lower wing, the investor will exercise their put options from the body and is almost guaranteed to be allocated on the upper wing; the risk is that they are not assigned on the lower wing.
If the stock is trading toward the top wing, the investor runs the danger of getting allocated at that level.
The underlying issue with assignment ambiguity is the possibility that the investor's position will be different than expected when the market reopens following expiry weekend, exposing the investor to weekend occurrences.