Short Put Butterfly

Short Put Butterfly

Components

Long two ATM put options, short one ITM put option and short one OTM put option.

Risk / Reward

Maximum Loss: Limited to the net difference between the ATM strike less the ITM strike less the premium received for the position.

Maximum Gain: Limited to the net premium received for the option spread.

Characteristics

When to use: When you are bullish or bearish on market direction and bullish on volatility.

Short put butterfly's have the same characteristics as the Short Call Butterfly - the only difference is that we use put options instead of call options.

Short butterfly's are an excellent strategy if you expect the market to move, however, you are unsure about what direction the market will move. For example, say there is an announcement due regarding earnings or a Government figure to be released. You might be nervous about market activity and expecting a large move in either direction.

In these types of situations you might want to consider implementing a short butterfly strategy - even though your profits are limited they are inexpensive to establish therefore giving you a higher return on investment.

Comments (2)

PeterMarch 22nd, 2011 at 3:39am

Max loss is the difference between the two strikes less the net premium received for the position.

garryMarch 22nd, 2011 at 2:38am

What is the Maximum Loss if you buy a put at a strike of 9 and sell a put at 10 in the same month?

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