Short Put Butterfly

What is a Short Put Butterfly?

A short put butterfly is the put-based version of a short butterfly. You sell one lower-strike put, buy two middle-strike puts, and sell one higher-strike put. You collect a credit to enter. The trade profits when the stock moves significantly in either direction, away from the middle strike.

It is the opposite of a long put butterfly. Where a long put butterfly wants the stock to park at the middle strike, the short put butterfly wants the stock to leave that area. You profit from movement and get hurt by stagnation. The payoff is identical to a short call butterfly — just built with different instruments.

How to Set It Up

• Sell 1 put at the lowest strike (A)
• Buy 2 puts at the middle strike (B)
• Sell 1 put at the highest strike (C)
• All same expiration
• Equal spacing between strikes. For example: 95/100/105
• Expiration: 30-60 days. You need the stock to move before time decay compresses the position.
• Net credit: Small credit received. The two short puts (wings) are worth more combined than the two long puts (body).

Like all butterflies, the credit is small. This is a low-premium, low-reward, defined-risk trade.

When to Use This Strategy

Use a short put butterfly when:

• You expect the stock to move away from its current price
• You want a cheap way to bet on volatility
• There is an upcoming catalyst (earnings, trial results, etc.)
• You prefer puts for liquidity or pricing reasons
• You want defined risk on a directional or volatility thesis

This is a niche strategy with limited standalone use. The max profit is just the credit received. It appears more often as a component of a larger portfolio or hedging strategy than as a primary trade.

Example Trade

Stock XYZ is trading at $100. You expect a big move.

• Sell 1 XYZ $95 put for $2.00
• Buy 2 XYZ $100 puts for $4.00 each ($8.00 total)
• Sell 1 XYZ $105 put for $7.00
• Net credit: $2.00 + $7.00 - $8.00 = $1.00 ($100 collected)

If XYZ rallies to $110: All puts expire worthless. You keep the $100 credit. Max profit.

If XYZ drops to $88: The $95 put is worth $7 (you owe), the two $100 puts are worth $12 each ($24 — you receive), the $105 put is worth $17 (you owe). Net: -$7 + $24 - $17 = $0. You keep the $100 credit.

If XYZ stays at $100: The $95 put is worthless, the two $100 puts are worthless, the $105 put is worth $5 (you owe). Loss: $5 - $1 credit = $400.

Risk and Reward

• Max profit: Net credit received. $100. Achieved when the stock is at or below the lowest strike, or at or above the highest strike at expiration.
• Max loss: (Wing width - net credit) x 100. ($5 - $1) x 100 = $400. Occurs when the stock pins at the middle strike.
• Breakeven: Lower strike + credit ($95 + $1 = $96) and upper strike - credit ($105 - $1 = $104).

The risk-to-reward is unfavorable on paper (risk $400 to make $100), but the probability of max loss is low since it requires the stock to land precisely at the center strike.

Tips and Common Mistakes

• The credit will be small. Do not enter this trade expecting a windfall. The typical credit barely covers commissions on some brokers.
• Use it as a hedge or complement. This strategy works better as part of a bigger position than as a standalone trade.
• Close early when profitable. If the stock moves quickly away from center, take the small profit and move on.
• Watch for early assignment on the short ITM put. The higher-strike short put is in the money at entry. You could be assigned early, especially near ex-dividend dates.
• Compare pricing between calls and puts. Sometimes the call butterfly offers a better credit than the put version due to skew.

Related Strategies

• Long Put Butterfly — the opposite: profits when the stock stays at the middle strike
• Short Call Butterfly — same payoff using calls
• Strangle — another volatility play with unlimited profit potential