Short Put Butterfly

A Short Put Butterfly is a combination of selling a Put, buying 2 lower strike price Puts, and selling an even lower strike price Put, with the same width across all strikes.

Payoff Diagram:

Direction Assumption: Neutral if done with ATM long strikes, or Bearish if done with OTM long strikes.

Maximum Profit: Limited to net premium collected.

Maximum Loss: Limited to the higher Short Put strike minus Long Put strike minus net premium collected.

Breakeven Price: • On the lower end, lower Short Put strike plus the net credit collected. • On the higher end, higher Short Put strike minus the net credit collected.

Theta: Passage of Time -> Negative Effect The net effect of time decay is negative. Should the underlying stays between the short strikes at expiration, all legs will decay to zero and expire worthless.

Volatility: If Volatility decreases -> Negative Effect. If Volatility increases -> Positive Effect. Short Call Butterflies are Vega positive, meaning that if volatility increases, the position gains value.