Short Put Butterfly (Buy 2 ATM Put, Sell 1 ITM Put, Sell 1 OTM Put)

Short Put Butterfly (Buy 2 ATM Put, Sell 1 ITM Put, Sell 1 OTM Put)

A Short Put Butterfly is a strategy for volatile markets. It is the opposite of Long Put Butterfly, which is a range bound strategy. The Short Put Butterfly can be constructed by Selling one lower striking in-the-money Put, buying two at-the-money Put and selling another higher strike out-of-the-money Put, giving the investor a net credit (therefore it is an income strategy). There should be equal distance between each strike. The resulting position will be profitable in case there is a big move in the stock / index.

Market Scenario: neutral on market direction and bullish on volatility.

Risk: Limited (net difference between the adjacent strikes (Rs. 100 in this example) - premium

Reward: Limited to the net premium received

BEP:   Upper BEP = Strike Price of Highest Strike Short Put - Net Premium Received

            Lower BEP = Strike Price of Lowest Strike Long Put + Net Premium Received

EXAMPLE:
Entry:

SPOT

5000

	STRIKE	PREMIUM
SELL 1 ITM PUT	5100	121
BUY 2 ATM PUT	5000	80*2 = 160
SELL 1 OTM PUT	4900	42

UPPER BEP: 5100 - 3 = 5097                                               LOWER BEP: 4900 + 3 = 4903

On Exit if:

SPOT	OTM PUT	ATM PUT	ITM PUT	STRATEGY PAY-OFF
4700	-279	440	-158	3
4800	-179	240	-58	3
4900	-79	40	42
4903	-76	34	42	0
5000	-21	-160	42	-97
5097	118	-160	42	0
5100	121	-160	42	3
5200	121	-160	42	3
5300	121	-160	42	3

Short Put Butterfly - Strategy Pay-Off