##### Construction

The long put butterfly is almost identical to the long call butterfly. Their difference is that the former consists of puts and the latter consists of calls. The long put butterfly involves three different strikes and it is constructed by a long ITM put, a long OTM put and two written ATM puts. The two long puts strikes should be equidistant from the middle short puts strike.

It is a debit spread because the money we have to pay for the long puts is more than the money we earn from the written puts.

##### When to use

When we expect that the price of the underline security will not move much in either direction. Preferably we want the underline security to be exactly at the middle (ATM) strike in order to achieve maximum profit, which is limited. Maximum potential loss occurs when at expiration the price of the stock is at or above the higher strike or at or below the lower strike. The rationale, as we can see, is the same as in the long call butterfly.

It is not an easy strategy to implement because someone must predict with great accuracy the price of the underline at expiration and the stock must stay relatively stable for the time horizon of the trade, which is quite difficult in today’s volatile markets.

Notice also that the goal in the long put butterfly is the same as in the long call butterfly and the short straddle (the price of the underline security at expiration must be exactly at the ATM strike or near it).

##### Loss/Profit at expiration

Maximum loss: Net premium paid + commissions.

Maximum profit: (Middle ATM strike – lower OTM strike) – net premium paid – commissions.

##### Profit/Loss diagram

Below we can see the profit/loss diagram for the long put butterfly strategy. We are long one ITM put with strike $28 and premium $3.50, one OTM put with strike $22 and premium $0.50 and short two ATM puts with strike $25 and premium $1. Notice that it looks the same as the profit/loss diagram of the long call butterfly.

##### Long put butterfly strategy example

In the daily chart of AEE (below) we have spotted a support (line 1) and a resistance (line 2) which, as we believe, will hold the stock within a range for the short term. Price now is at $31.70 (point A) and we expect that for the next one week it will remain relatively unchanged near $32. We don’t expect any important news about the company.

We can buy one OTM put with strike $30 and premium $0.20, one ITM put with strike $34 and premium $2.50 and write two ATM calls with strike $32 and premium $0.60. All of them will expire after one week. The aggregate premium we have to pay is $150 {[($2.50+$0.20)-(2x$0.60)]x100}.

If the price of the underline at expiration is exactly $32 (ATM strike), we accomplish the maximum profit which is $50 {[($34-$32)x100]-$150} minus commissions. If the price at expiration is let’s say at $28, then the two short puts will be exercised against us and we will have a loss of $800 [($32-$28)x200]. The long lower strike put is ITM and by exercising it we will have a profit of $200 [($30-$28)x100]. The long higher strike put is also ITM and by exercising it we will have a profit of $600 [($34-$28)x100]. So, the total loss is equal to the total profit ($800=$200+$600) and what remains in the end as a loss is the net premium we paid plus commissions.

In this example the maximum profit we could achieve is $50 minus commissions and the maximum loss we could suffer is $150 plus commissions, if the stock price at expiration is at or beyond the higher or lower strikes.