Short Put Butterfly
The inverse of the Long Put Butterfly — sell the outer strikes and buy 2 ATM puts. Profits on a strong directional move.
Profit / Loss Diagram
Short Put Butterfly at expiration
What is this strategy?
The Short Put Butterfly is the inverse of the Long Put Butterfly and functionally equivalent to the Short Call Butterfly. It is a long-volatility strategy with both risk and reward capped.
Useful ahead of specific catalyst events when you expect a sharp move without knowing the direction. Both cost and reward are limited — an alternative to a long straddle when high implied volatility makes the straddle prohibitive.
Choose between the Short Put Butterfly and the Short Call Butterfly according to which side of the underlying’s chain is more liquid.
Construction
| Action | Instrument | Strike | Expiration | Example |
|---|---|---|---|---|
| SELL | 1 Put | Lower OTM (A) | 30-45 DTE | -1 SPY 440 Put |
| BUY | 2 Puts | ATM (B) | Same expiry | +2 SPY 450 Put |
| SELL | 1 Put | Upper ITM (C) | Same expiry | -1 SPY 460 Put |
Example
SPY at $450 ahead of an event. Short put butterfly 440/450/460.
- Net Credit +$300
- Maximum Gain $300 (the credit) if SPY < $440 or > $460
- Maximum Loss $700 if SPY = $450 exactly
The Greeks
Same as the Short Call Butterfly.
Time works against you.
Benefits from rising implied volatility.
Long gamma.
Position Management
- 01 Same as the Short Call Butterfly Open pre-event, close post-event.