Double Butterfly – The Option Strategy Desk Reference

Double Butterfly

Strategy: Typically Traded on Weekly European-style Index Options (RUT, SPX, NDX); Combines Two Long Call or Long Put Butterfly Trades That Expire Simultaneously Inside 8 to 10 Days; Typically Balanced, that is, Identical Strike Widths.

Strategy (Put Example):

1st Trade Placed Below 2nd Trade:

Buy n OTM Puts 8 DTE

Sell 2n Puts, Higher Strike

Buy n Puts, Higher Strike, Inside 1σ As Shown

2nd Trade Placed Above 1st Trade:

Buy n Puts (May Be ATM or ITM), Inside 1σ As Shown

Sell 2n Puts, Higher Strike

Buy n Puts, Higher Strike


Price Chart: Currently moving sideways; looking for a drop or a rally to benefit one of the butterfly trades

Current IV%: 50% (Neutral for moderate premium values; avoid either high or low current volatility levels.)

IV Rank: 50

Trade: Enter two butterfly trades, one above and one below the ATM strike. Notice how the long central options are at strikes within 1 standard deviation (1σ). Also notice how the example uses 25-point strike widths throughout. Because six strikes are used by the double butterfly, it requires two trades.

Typical Strike Deltas:

Lower Butterfly Upper Long Put 0.45

Upper Butterfly Lower Long Put 0.65

(Notice how both of these long puts are inside 1σ.)

NOTE: Long butterflies that include long wing options and short body options are more popular than short butterfly options. Short call and put butterflies are included for comparison purposes. (See the long call butterfly’s note and table for more information.)

Goals: This is a short-term “set and forget” trade that is closed when a profit of 10 to 15 percent is achieved. The profit “zones” cover either a price rally or drop. The winning trade is retained while the losing trade is closed. European-style options are used to prevent assignment prior to expiration.

Manage: Watch for a directional price move in the underlying financial index. Close the losing legs and retain the winning leg(s). For example, the OTM short central strikes might be retained and permitted to expire worthless while the losing long puts are closed to minimize loss. The winning butterfly is retained for profit. Butterfly trades are usually closed several days prior to expiration to avoid gamma risk. Butterfly trades are typically closed when they are within 25 percent of the time remaining till contract expiration. Because losses from long butterfly options are limited, occasional losses are considered acceptable.

Profit: Close losing positions and sell the long puts when this trade achieves either breakeven or a profit or suffers a small loss. If the SPX settles at either $1,650 or $1,750, this trade can potentially produce $2,200 in profit.

Loss: This double butterfly can potentially lose $300, as it combines a $200 debit for the bottom butterfly with a $100 debit or the top butterfly. The trader would likely close both butterflies with 3 or 4 days remaining till expiration. DO NOT PERMIT OPTIONS TO ­EXPIRE ITM!