Put Butterfly Spread Strategy

The Put Butterfly Spread is a neutral options strategy designed to profit from minimal price movement in the underlying asset. It combines a bear put spread and a bull put spread using three strike prices and four put options with the same expiration. Traders use this strategy when they expect the stock to stay near a specific price at expiration, benefiting from time decay and a drop in volatility.

Structure

• Buy 1 lower strike put (long wing)
• Sell 2 middle strike puts (short body)
• Buy 1 higher strike put (long wing)
• All options share the same expiration date

Profit & Loss Profile

• Max Profit: Achieved if the stock closes at the middle strike at expiration
• Max Loss: Limited to the net debit paid to enter the trade
• Breakeven Points: Lower strike + net debit and Higher strike − net debit

Ideal Market Conditions

• Neutral outlook with low expected volatility
• Best when implied volatility is high at entry and expected to decline
• Use when the stock is expected to stay near the middle strike price

Example

A stock is trading at $100. You:

• Buy 1 put at $95 for $1
• Sell 2 puts at $100 for $3 each
• Buy 1 put at $105 for $6

Net debit = $1. If the stock closes at $100, the short puts expire worthless and the $105 put is worth $5. After subtracting the $1 debit, your profit is $4.

Risks & Considerations

• Requires precise price targeting for max profit
• Assignment risk on short puts if in-the-money
• Time decay and volatility shifts can impact profitability