The long put butterfly spread is a limited profit, limited risk options trading strategy that is taken when the options trader thinks that the underlying security will not rise or fall much by expiration.
Buy 1 put at the lowest strike price; Sell 2 puts at the middle strike price; Buy 1 put at the highest strike price. Use the same expiration date.
There are 3 striking prices involved in a long put butterfly spread and it is constructed by buying one lower striking put, writing two at-the-money puts and buying another higher striking put for a net debit.
Profit potential
Profit is bounded for the stated stock/index position.
Highest strike price minus middle strike price minus net opening cost.
Loss potential
Loss is finite under the stated assumptions, but can be substantial. A stock or nonnegative index cannot fall below zero.
Calculate these amounts and use the largest: Twice the middle strike price plus net opening cost minus lowest strike price minus highest strike price; Net opening cost.
Breakeven points
The breakeven can change depending on which strikes the stock finishes between.
Calculate the breakeven prices
- Prices at or below the lowest strike price all break even only when the net opening cost equals lowest strike price plus highest strike price minus twice the middle strike price.
- Net opening cost plus twice the middle strike price minus highest strike price. Use this result only if it is between the lowest strike price and the middle strike price.
- Highest strike price minus net opening cost. Use this result only if it is between the middle strike price and the highest strike price.
- Prices at or above the highest strike price all break even only when the net opening cost equals zero.
Ignore results below zero. A boundary price listed twice is a single breakeven.
Example
Suppose XYZ stock is trading at $40 in June. An options trader executes a long put butterfly by buying a JUL 30 put for $100, writing two JUL 40 puts for $400 each and buying another JUL 50 put for $1100. The net debit taken to enter the trade is $400, which is also their maximum possible loss.
On expiration in July, XYZ stock is still trading at $40. The JUL 40 puts and the JUL 30 put expire worthless while the JUL 50 put still has an intrinsic value of $1000. Subtracting the initial debit of $400, the resulting profit is $600, which is also the maximum profit attainable.
Maximum loss results when the stock is trading below $30 or above $50. At $50, all the options expires worthless. Below $30, any "profit" from the two long puts will be neutralised by the "loss" from the two short puts. In both situations, the long put butterfly trader suffers maximum loss which is equal to the initial debit taken to enter the trade.
Commissions
These examples exclude commissions and fees. Include all transaction costs when evaluating the profit or loss of a position.
Similar strategies
Short Butterfly
The converse strategy to the long butterfly is the short butterfly. Short butterfly spreads are used when high volatility is expected to push the stock price in either direction.
Long Call Butterfly
The long butterfly strategy can also be created using calls instead of puts and is known as a long call butterfly.
Wingspreads
The long put butterfly spread belongs to a family of spreads called wingspreads whose members are named after a myriad of flying creatures.
Net opening cost means everything paid to open the position, less everything received. Include the shares as well as the options. If opening the position brings in money overall, treat that cost as a negative amount.
Amounts are per share before fees. Multiply by the shares covered by the position; standard equity options usually cover 100 shares per contract. If a maximum profit or loss calculation gives a negative amount, use zero. These figures assume matching contracts held to expiration and do not include financing or early assignment.
Financial mechanics reviewed:
Sources: OIC strategy reference; OIC assignment guidance. Formulas use the stated payoff assumptions; examples are illustrative, not market quotes. Editorial standards and corrections.