Options Trading Strategies: Long Butterfly Puts

A long butterfly spread with puts is a four legged and three strikes strategy, created by buying one Out of The Money put, selling two At The Money puts, and buying one more In The Money put. All puts are with a same expiration date and the two short put strikes are equidistant to the middle strike.  

A long butterfly spread with puts is identical to the long butterfly with calls, only instead of calls you use all puts, and the opposite to the short butterfly with puts strategy.

You can look at a long butterfly spread with puts as a combination of a bull put spread and a bear put spread.

When to use this strategy?

You are neutral to moderately bullish and bearish on the volatility so you are expecting a minimal BTC/ETH price movement and want to earn a profit if the BTC/ETH stagnates or moves minimally.

Below is a Profit and Loss chart example of a short butterfly with puts options strategy:

Pros:

Maximum loss is capped.

Cons:

Maximum profit is restricted to the scenario where the BTC/ETH price is at the middle strike at expiration. The higher profit potential comes with a wider range between the strikes, which widens the spread lowering your probability for profit. The amount of the potential loss can be bigger than the amount of the potential profit.

Example:

In this example, BTC is trading at 36,547.44 USD, and you expect its price to stagnate or move moderately. You have bought an OTM put with a strike price of 36,000.00 USD, and sold two ATM puts with with a strike price of 37,000.00 USD, and bought an ITM put with a strike price of 38,000.00 USD, all with an expiration date of January 29^th 2022.

As this is a net debit spread, and the long puts costs you more than a premium from the short puts you have paid a net premium of 358.5 USD, which is also you maximum loss in this combination.

The Profit and Loss chart is given below:

Upon expiration:

If the BTC price is below the OTM short put, then both long puts are exercised and both short puts are assigned. The result is that 2 BTC are sold and 2 are purchased and this is your maximum profit.

If the BTC price is above the OTM short put and at or below the center, ATM long put, strike, you are in the profit as long as the BTC price is below the first break even price.

Your maximum loss is at the center strike price and its equal to the difference between the adjacent strikes minus the net premium.

If the BTC price is below the ITM short put (the highest strike) and at or above the center strike, then the ITM short put is assigned and the two ATM long put are exercised. You will realize profit as long as the BTC price is above the second break even price

If the BTC price is above the highest strike price, then all puts expire worthless and this is again your maximum profit.

BTC at Expiry (USD)	Payoff (USD)
36,000.00 (strike price LP OTM)	-350.5 (max loss)
36,126.00	-232.5
36,358.5 (break even 1)	0
36,650.00	+291.5
37,000.00 (2 x SP ATM)	+641.5 (max gain)
37,300.00	+341.5
37,641.5 (break even 2)	0
37,830.00	-188.5
38,000.00 (strike price LP ITM)	-358.5 (max loss)