Strategy: Sell n ITM Puts, ≤ 14 DTE
Buy 2n ATM or Slightly OTM Puts, Same Expiry
Sell n OTM Puts, Same Expiry,
(Same Width Between Strikes)
Price Chart: Strong directional price fluctuations
Current IV%: ≈ 50%
IV Rank: ≈ 50
Trade: Sell n ITM put options; buy 2n ATM put options; sell n OTM put options.
Typical Strike Deltas:
Lower Short Puts ≈ 0.45 to 0.47
Central Long Puts ≈ −0.48 to −0.52
Higher Short Puts ≈ 0.52 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 requires a strong directional price breakout, and even then, this strategy cannot succeed without careful trade management.
Manage: This trade requires careful management and would rarely be left in its original form, which is potentially a losing trade. Instead, it would more likely be legged into a vertical put on the basis of the underlying’s directional price move. If the central long puts of the body move ITM, close one or both of the short put wings. (Remember, butterfly trades are typically closed when approximately 25 percent of the time till expiration remains.)
Profit: Close losing short positions; sell the long puts when this trade returns a profit of 15 to 20 percent.
Loss: A debit is required when entering this trade. It will suffer a loss unless it is legged into either a vertical put spread or an ITM long put. Many traders avoid short put and short call butterflies. DO NOT PERMIT OPTIONS TO EXPIRE ITM!