Call Butterfly
Buy one lower call, sell two middle calls, buy one higher call. A cheap, defined risk bet that the market pins the middle strike.
Learn strategyNeutral3 LegsDefined risk
Put Butterfly
Buy one higher put, sell two middle puts, buy one lower put. A low cost, defined risk bet that the market settles near the middle strike.
By Team Agora Circle
Written by the Agora Circle editorial team. Educational content, explained for the Indian market. Not investment advice.
- Market outlook
- Neutral, low volatility. You expect the index to finish near the middle strike.
- Setup
- Buy 1 higher put, sell 2 middle puts, buy 1 lower put, evenly spaced.
- Max profit
- Capped. The distance between strikes minus the net debit, at the middle strike.
- Max loss
- Limited to the small net debit paid, at or beyond either outer strike.
- Breakeven
- Upper strike minus net debit, and lower strike plus net debit.
- Implied volatility
- Short vega near the middle. Falling implied volatility helps as expiry nears.
- Time decay
- Time decay works in your favour when the price is parked near the middle strike.
Strategy Overview
A put butterfly is the put based version of the butterfly, and it produces the same tent shaped payoff as a call butterfly at the same strikes. You buy one higher put, sell two middle puts, and buy one lower put, in a one, two, one ratio. The position peaks at the middle strike and slopes to a small fixed loss on either side, all for a tiny net debit.
As with the call butterfly, the two sold middle puts finance most of the cost of the two bought wings, so the outlay and the maximum risk are small. If the index settles near the middle strike at expiry, the payoff is a large multiple of the debit.
It is a precision, range bound trade. The profit zone is narrow, so it rewards a specific view of where the market will finish rather than a directional call. Traders often prefer the put version when puts are pricing more favourably than calls at the chosen strikes.
How to Set It Up
Three strikes, evenly spaced, in a one two one ratio built entirely from puts.
- 1Buy 1 put at a strike above your target level.
- 2Sell 2 puts at the target middle strike, where you expect the index to finish.
- 3Buy 1 put at an equal distance below. The small net debit is your maximum loss.
Payoff Diagram and Example
Max Profit
Capped. The distance between strikes minus the net debit, at the middle strike.
Max Loss
Limited to the small net debit paid, at or beyond either outer strike.
Breakeven
Upper strike minus net debit, and lower strike plus net debit.
Suppose NIFTY is at 25,000 and you expect it to stay near that level. You buy the 25,200 put for 320, sell two 25,000 puts for 190 each, and buy the 24,800 put for 110. The net debit is 320 minus 380 plus 110, or 50 points. With a lot size of 75, the maximum loss is 50 x 75 = Rs 3,750.
If the index finishes at 25,000, the 25,200 put is worth 200, the two sold 25,000 puts expire worthless, and the 24,800 put expires worthless, for a peak profit of 200 minus the 50 debit, or 150 points, about Rs 11,250.
The breakevens are 25,150 and 24,850. Beyond 25,200 or below 24,800 the structure settles at its maximum loss of 50 points. The profit zone is the narrow band around 25,000.
Entering and Exiting
Enter all three legs together so the ratio and the net debit are locked.
The tent shape sharpens as expiry nears, so put butterflies are often held closer to expiry, when the value near the middle strike builds.
Exit by closing the package, usually taking a good fraction of the peak rather than risking a late drift away from the middle strike in the final hours.
Time Decay (Theta)
Time decay helps when the index sits near the middle strike, because the two sold middle puts lose value faster than the bought wings. That decay is what lifts a well placed butterfly toward its peak as expiry approaches.
Away from the middle strike the decay works less in your favour and the position drifts to its small maximum loss. The peak forms only around the central strike.
Implied Volatility (Vega)
Near the middle strike the position is net short volatility, so falling implied volatility helps it as expiry nears. A drop in IV compresses the sold middle puts in your favour.
Because the risk is so small, the volatility exposure is modest in rupee terms. The main driver of the result is where the index finishes, not the path of IV.
Common Adjustments
If the index drifts toward one wing, roll the whole butterfly in that direction to recentre the middle strike on the new expected level.
Widen the strikes for a larger profit zone at a higher cost, or narrow them for a cheaper, more precise bet.
Given the tiny fixed risk, the simplest response to a losing put butterfly is often to let it expire or close it rather than adjust.
Synthetic Equivalent
A put butterfly is a long put vertical, buy the higher put and sell the middle put, combined with a short put vertical, sell the middle put and buy the lower put, sharing the middle strike where two puts are sold.
It carries the same payoff as a call butterfly and an iron butterfly at the same strikes, so the three are interchangeable in shape and are chosen on pricing and liquidity.
Pros and Cons
Pros
- Very low cost, so the maximum loss is small and known.
- Large reward relative to the tiny debit if the index pins the middle strike.
- Fully defined risk with no margin obligation beyond the debit.
- Time decay works in your favour near the middle strike.
- Often prices better than a call butterfly when puts are in demand.
Cons
- The profit zone is narrow, so the view has to be precise.
- Full profit is rarely captured, since it needs a near perfect pin at expiry.
- Three legs mean more brokerage and more bid ask spread to cross.
- Away from the middle strike, the position quietly settles at its maximum loss.
Frequently Asked Questions
Is a put butterfly different from a call butterfly?
In payoff, no. At the same strikes a put butterfly and a call butterfly have essentially identical tent shaped outcomes. The difference is only in which options are used, so the choice comes down to which of calls or puts is pricing and trading better at those strikes.
Is this a bearish strategy because it uses puts?
No. Despite being built from puts, it is a neutral, pinning trade centred on the middle strike. The put butterfly profits from the index settling near the centre, not from a fall.
What happens to a put butterfly if the index closes outside the outer strikes?
The small net debit paid, reached at or beyond either outer strike. In the example that is 50 points, or Rs 3,750 on one lot.
Where do I make the most money?
At the middle strike at expiry. In the example the peak profit of 150 points is reached only if the index finishes right at 25,000, and it tapers off toward the breakevens on either side.
Why hold it close to expiry?
Because the tent shape and the value near the middle strike only sharpen as time value drains from the sold middle puts. A butterfly opened well before expiry is fairly flat until the final days.
Related Strategies
Iron Butterfly
Sell an at the money straddle and buy protective wings. A rich credit if the market pins the strike, with losses capped on both sides.
Learn strategyShort Straddle
Sell a call and a put at the same strike to collect maximum premium. Profits if the market pins near the strike; losses are open on both sides.
Learn strategyPut Ratio Spread
Buy one put and sell two lower puts, usually for a credit. Profits from a modest fall to the short strike, with open ended risk below it.
Learn strategyThis page is for education only. It is not investment advice, and nothing here is a recommendation to buy or sell any instrument. Options involve substantial risk, and option sellers can lose far more than the premium they receive. Please do your own research or consult a SEBI registered investment adviser before trading. Read our full disclaimer.