Long Put Butterfly

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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.

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.

Limited Profit

Maximum gain for the Long Put Butterfly is attained when the underlying stock price remains unchanged at expiration. At this price, only the highest striking put expires in the money.

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Limited Risk

Maximum loss for the Long Put Butterfly is limited to the initial debit taken to enter the trade plus commissions.

Breakeven Point(s)

There are 2 break-even points for the Long Put Butterfly position. The breakeven points can be calculated using the following formulae.

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 his 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 expire 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.

These examples use standard U.S. stock options with a 100-share contract size and matching expiration dates. Related structures can use ETF, index or futures options, but contract multipliers, exercise style, settlement and the underlying price range can differ. A stock’s zero price floor must not be assumed for every futures contract.

Commissions

Commission charges can make a significant impact to overall profit or loss when implementing option spreads strategies. Their effect is even more pronounced for the Long Put Butterfly as there are 4 legs involved in this trade compared to simpler strategies like the vertical spreads which have only 2 legs.

For active traders, transaction costs can consume a significant part of returns. Compare the full commission and fee schedule, exercise and assignment charges, and bid-ask spreads. The cost of entering and closing every leg matters.

Similar Strategies

The following strategies offer related market exposure. Compare their construction, cost, maximum loss and assignment obligations; a similar outlook does not mean identical risk.

Neutral Calendar Spread

Iron Condors

Iron Butterfly

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.

Before expiration and assignment

The diagrams and worked outcomes describe expiration payoffs, not an option’s market price before expiration. Time decay, implied volatility, rates, dividends and bid-ask spreads affect early closing values. American-style short options can be assigned early; a protective long option is not automatically exercised when a short leg is assigned. Closing or exercising one leg can change the remaining position’s risk.