Options Trading Strategies: Short Butterfly Puts
A short butterfly spread with puts is a four legged and three strikes strategy, created by selling one Out of The Money put, buying two At The Money puts, and selling 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 short butterfly spread with puts is identical to the short butterfly with calls, only instead of calls you use all puts, and the opposite to the long butterfly with puts strategy.
Same as short puts condor, you can look at a short butterfly spread with puts as a combination of a bear put spread (OTM short put + one ATM long put) and a bull put spread (ITM short put + ATM long put).
When to use this strategy?
You are neutral on the market movement and bullish on the volatility, so you are expecting a BTC/ETH price movement outside the range of the highest and lowest strike price and want to earn a profit if the BTC/ETH makes a drastic move in either direction.
Below is a Profit and Loss chart example of a short butterfly with puts options strategy:
Pros:
Maximum loss is capped.
Cons:
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 36,545.82 USD, and you expect its price to dramatically move in either direction. You have sold an OTM put with a strike price of 35,000.00 USD, bought two ATM puts with with a strike price of 37,000.00 USD, and sold an ITM put with a strike price of 39,000.00 USD, all with an expiration date of February 4th 2022.
As this is a net credit spread, and the long puts cost you less than a premium from the short puts you have received a net premium of 513.1 USD, which is also you maximum profit 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) |
|---|---|
| 35,000.00 (strike price SP OTM) | +513.1 (max gain) |
| 35,242.00 | +271.10 |
| 35,513.1 (break even 1) | 0 |
| 36,228.00 | -714.90 |
| 37,000.00 (2 x LP ATM) | -1,486.9 (max loss) |
| 37,658.00 | -828.90 |
| 38,486.9 (break even 2) | 0 |
| 38,848.00 | +360.10 |
| 39,000.00 (strike price SP ITM) | +513.1 (max gain) |