The short butterfly spread with puts is similar to the strategy described above, but this time it uses put options instead of call options. The strategy is generally entered into for a net credit and has both limited potential profits and limited potential losses. This strategy is ideal for times when you expect the underlying security to stay within certain boundaries for a certain period but is not advisable for investors who are bearish on the underlying security. Our platform makes it easy to try different strategies such as this one or even see what past strategies have worked well in similar economic and market situations.
In this advanced strategy, a trader purchases or writes (sells) one call option at one strike price, purchases or writes (sells) the same number of call options at another strike price, and then sells or buys (buys) an equal number of call options at yet another strike price. All of these are done on the same underlying security, with the same expiration date. There are several strategies to choose from based on three to five different strike prices and whether options are purchased or written/sold.
The maximum profit in a long (bullish) butterfly put option spread is equal to the net credit received. At expiration, if the stock price is above the highest strike price or below the lowest strike price, then all puts expire worthlessly and the net credit is kept as income. If the stock price is between the two middle strikes, then all three options are exercised, and a net value of zero results. As a result, once again, the net credit fewer commissions is kept as income.
The short put (naked put) spread is a 3-part strategy that involves selling a put at a certain strike price, and buying the two puts on either side of the sold put at lower strike prices. This results in initial credit to your account. The maximum risk is equal to the difference between the center and lowest strike prices less the net credit received minus commissions, and a loss of this amount is realized if the stock price is equal to the center strike price (long puts) at expiration. In the example above, the difference between the center and lowest strike prices is 5.00, and the net credit received is 1.20, not including commissions. The maximum risk, therefore, is 3.80 fewer commissions.
Potential position created at expiration
If the stock price is below the highest strike and at or above the center strike, then the highest strike short put is assigned. The result is that 100 shares of stock are purchased and a stock position of long 100 shares is created. A Butterfly put option Spread with Puts is a limited risk, limited profit trading strategy that is created by purchasing one put at the middle strike price, selling two puts with a lower strike price, and buying one put with a lower strike price. The net effect of doing this results in a position where the investor should buy 100 shares at the center strike price and the right to sell 100 shares at the lowest strike price.