Long Put Butterfly
A neutral, low-cost strategy combining a bull put spread and a bear put spread — excellent risk/reward with limited capital at risk, ideal for range-bound markets.
A long put butterfly combines a bull put spread and a bear put spread sharing the same middle strike. All three legs use put options with the same expiration. It profits when the underlying closes near the middle strike at expiration.
Structure (3 strikes, 4 contracts):
- Buy 1 put at Strike A (highest — upper wing)
- Sell 2 puts at Strike B (middle — the body)
- Buy 1 put at Strike C (lowest — lower wing)
Strike A > Strike B > Strike C, all equally spaced. Strike B is typically ATM.
Decreasing Volatility (IV Crush)
Short middle strikes lose value faster than long wings — expands the profitable range and benefits the position.
Increasing Volatility
Rising IV increases all puts, but short middle strikes are hit harder — narrows the profitable range.
Time Decay — When Profitable
When stock is near Strike B, time decay is your friend. Short middle strikes decay faster than long wings.
Time Decay — When Losing
If stock has moved away from Strike B, time decay works against you by eroding the value of long wing puts.
- Low cost — small net debit
- Excellent risk/reward ratio
- Defined risk — max loss is net debit
- Benefits from IV crush
- Time decay helps when stock is near body strike
- Narrow sweet spot — max profit only at Strike B
- Three legs = more commissions
- Rising IV hurts — narrows profit window
- Time decay works against losers
- Assignment risk on short middle puts
Ideal Conditions:
- Range-bound market — expect stock to close near a specific price
- After a volatility spike — IV crush boosts the position
- Post-earnings when you expect the stock to settle
- Clear price target with strong conviction
Avoid When:
- Expecting a large directional move
- Implied volatility is very low
- Stock is trending strongly
- Bid-ask spreads are wide
- Buy 1 XYZ $110 Put @ $11.00
- Sell 2 XYZ $100 Puts @ $4.00 each
- Buy 1 XYZ $90 Put @ $0.50
Cost:
Net Debit: $3.50/share ($350 total)
P&L:
Max Profit: $6.50/share ($650) at $100
Max Loss: $3.50/share ($350)
Breakeven Points:
Upper: $110 − $3.50 = $106.50 | Lower: $90 + $3.50 = $93.50
- Take profit early — exit at 50–70% of maximum profit
- Know your max loss upfront — net debit is all you can lose
- Watch for early assignment on short puts (Strike B)
- Exit if stock breaks above Strike A or below Strike C
- Prefer liquid underlyings with tight bid-ask spreads