Strategy: Buy n ITM Puts, ≤ 14 DTE
Sell 2n ATM or Slightly OTM Puts, Same Expiry
Buy n OTM Puts, Lower Strike, Same Expiry
(Same Width Between Strikes)
Price Chart: Downtrending
Current IV%: ≈ 50%
IV Rank: ≈ 50
Trade: Buy n ITM put options; buy 2n ATM put options; sell n OTM put options.
Typical Strike Deltas:
Lower Long Puts ≈ ≥ −0.47 to −0.45
Central Short Puts ≈ 0.48 to 0.45
Higher Long Puts ≈ −0.50 to −0.55
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 trade relies on a drop in the price of the underlying security. Place the strikes of the butterfly to profit from a drop in the price of the underlying. The butterfly is a defined-risk strategy. Losses are limited when a strong rally in the price of the underlying occurs.
Manage: Close the butterfly several days prior to expiration before gamma risk begins to “whipsaw” premium value. Be ready to close this trade quickly when the price is in the bottom one-third of the witch’s hat of the risk profile.
Profit: Close when this trade returns a profit of 15 to 20 percent.
Loss: This trade experiences a limited loss that rarely exceeds 20 percent. DO NOT PERMIT OPTIONS TO EXPIRE ITM!