Short Put Butterfly can consist of either a call option contract or a put option contract.

The two different contract types make up two combinations of selling butterfly spreads: Short Put Butterfly and Short Call Butterfly.

Take the Short Put Butterfly as an example. If you expect the stock price to fluctuate slightly, but are unsure about the direction of the stock price fluctuation, and want to achieve profits at a low cost and with controlled risk under such circumstances, you can use a Short Put Butterfly.

How to build

The bShort Put Butterfly consists of three options transactions

● Sell 1 copy of put1

● Buy 2 copies of put2

● Sell 1 copy of put3

The underlying assets and expiration dates of Put1, Put2, and Put3 are all the same. The differences are:

Exercise price: put1＜put2＜put3, and put3-put2=put2-put1

Number of open positions: put1: put2: put3 = 1:2:1

Strategy brief

Selling a Short Put Butterfly. Generally, opening a position is to sell 1 real option put3 with a higher strike price, buy 2 parity options put2 with an intermediate exercise price, and then sell 1 imaginary option with a lower strike price. The three exercise price spreads are equally spaced, and the expiration date is the same.

In this strategy, selling put3 and selling put1 are the main trading parts to meet investors' expectations that “it is expected that the stock price will fluctuate greatly in the future”. Buying 2 copies of put2 is mainly used to control the risk of putting 1 and selling put3.

Generally, when selling a Short Put Butterfly strategy, the premium income obtained by selling put1 and put3 when opening a position will be higher than the option premium expenses of entering 2 put2 copies, so at the beginning of strategy construction, the strategy showed a net inflow on the book.

Moreover, we can also calculate the maximum profit and loss of the strategy at the beginning of strategy construction. The Short Put Butterfly strategy for selling put options is a limited combination of profit and loss.

When the stock price is higher than the highest exercise price or lower than the minimum exercise price, the strategy generates the greatest return, which is the combined net option premium income.

When the stock price is equal to the intermediary exercise price, the strategy makes the biggest loss, minus the lower exercise price for the intermediate exercise price and then the net option premium income.

It is important to note that this strategy requires trading 4 options, and 8 options at a time. The transaction cost is relatively high, and the actual cost needs to be calculated during actual use.

At the same time, the maximum profit of the strategy is the net option premium, so the price effectiveness of the option during the opening period is important to avoid a mismatch between the price of the option during the opening period and the value of the option that is unfavorable to itself.

Furthermore, a 4-leg option means that after opening a position, investors can flexibly adjust and change strategies according to market changes, such as changing to a 3-legged, 2-legged, or even 1-legged strategy.

Risks and benefits

● Break-even point

Low break-even point: stock price = low exercise price+net option premium

High break-even point: stock price = high exercise price - net option premium

● Maximum profit

Net option premium income

● Maximum loss

Maximum loss = intermediate exercise price - high exercise price - net option premium income

Examples of calculations

Assuming that in the US stock market, TUTU's current stock price is 52 dollars. You think TUTU's stock price will fluctuate greatly in the next month, but you don't know the direction of fluctuation. If you want to achieve low cost and risk-controlled profits under such expectations, you can use the Short Put Butterfly strategy of selling put options.

Sell 1 put with an exercise price of 56 US dollars at a price of 2 US dollars;

Buy 2 puts with an exercise price of 52 US dollars at a price of 3 US dollars;

Sell 1 put with an exercise price of 48 US dollars at a price of 6 US dollars;

At maturity, your earnings will be as follows:

Explanation:

1. The article uses stocks as option targets to explain strategies. The actual investment bid can also be stock indices, futures contracts, bonds, currencies, etc.;

2. Unless otherwise specified, all options in this article refer to on-market options;

3. The TUTU company in the article is a virtual company;

4. The relevant calculations in this article do not take into account handling fees. In actual options investment, investors need to consider transaction costs.