A short put butterfly option strategy consists of selling one low-strike put, buying two middle-strike puts, and selling one high-strike put, all with the same expiration date. The middle strike price is centered between the upper and lower strikes. This position yields an initial net credit. It is used by traders who anticipate that the underlying stock will experience strong volatility and move far away from the middle strike price before expiration.
The maximum gain is capped at the net credit received when entering the trade, achieved if the stock price ends up above the highest strike or below the lowest strike at expiration. The maximum loss takes place if the stock price lands precisely at the middle strike price when the options expire, equaling the difference between the strikes minus the initial credit.
- Sell $95 Put for $1.00
- Buy two $100 Puts for $3.00 each
- Sell $105 Put for $6.00
- Stock ≤ $95 or ≥ $105: +$100 Max Profit
- Stock at $96 or $104: $0 Breakeven
- Stock at $100: -$400 Max Loss