Short Put
Butterfly

What is a short put butterfly?

A short put butterfly is the inverted form of a butterfly built from put options at three evenly spaced strikes. You sell one higher-strike put, buy two middle-strike puts, and sell one lower-strike put — all in the same expiry. Because the two short wings out-value the two long body puts, the trade opens for a small net credit, and that credit is your profit if the underlying moves away from the centre either way.

It produces the same inverted payoff as the short call butterfly — only the construction differs. The single losing outcome is a close right at the middle strike, and even that loss is capped, making this a defined-risk way to bet on movement rather than direction into expiry.

Key takeaways

• A short put butterfly is a movement (volatility) bet — it profits when the underlying leaves the middle strike either way.
• It opens for a small net credit, which is also the maximum profit you can keep.
• The only loss happens if the price expires near the centre — and that loss is capped.
• Risk is defined on both sides, so margin is light versus a naked short put.
• Time decay works against you while the price hovers near the centre; you want a decisive break.

How it works

The legs sit at equal spacing — strikes A (low), B (middle) and C (high). You sell 1 put at C, buy 2 puts at B, and sell 1 put at A. The premium from the two short outer puts exceeds the cost of the two long body puts, so a modest credit lands in your account on entry. The position is fully wrapped, so the worst case is a known, capped figure and the SPAN + exposure margin blocked is far smaller than for an outright short put.

At expiry the payoff is an upside-down tent: you keep the full credit whenever the underlying finishes beyond either wing, and the position falls to its maximum (small) loss only if the price lands exactly at the middle strike. Because this is the opposite of a pinning trade, theta works against you while the price drifts near B, and a rise in implied volatility helps once you are positioned for a move. For NIFTY and Bank Nifty the legs are cash-settled; single-stock puts carry assignment and physical-settlement nuances near expiry.

The numbers that matter

Worked NIFTY example

Suppose NIFTY is near 22,500 and you expect a sharp move into expiry but cannot call the direction. You build an inverted put butterfly around 22,500: sell the 22,700 put, buy two 22,500 puts, and sell the 22,300 put. The net credit is about ₹60. With a lot size of 75, you collect ₹60 × 75 = ₹4,500 up front (illustrative figures):

• Wing width: 200 points; max loss = (200 − 60) × 75 = ₹10,500 at 22,500.
• Max profit: ₹4,500, kept if NIFTY closes at or below 22,300 or at or above 22,700.
• Breakevens: 22,360 and 22,640.

NIFTY at expiry	Outcome	P&L (1 lot)
22,300 or below	Wings offset, credit kept	+₹4,500
22,360 (breakeven)	Edge of profit zone	₹0
22,500 (centre)	Worst case	−₹10,500
22,640 (breakeven)	Edge of profit zone	₹0
22,700 or above	All puts expire worthless	+₹4,500

The trade-off is the same as any inverted butterfly: you keep a small credit on a decisive move, but the centre is the danger zone where the capped loss runs several times the credit. The reward is small and likely; the loss is bigger but rare and bounded.

When to use a short put butterfly

• You expect a breakout or sharp move but are unsure of the direction.
• The underlying is coiled near a level ahead of an event or expiry and you doubt it will pin there.
• Implied volatility is low, so the structure is cheap to set and a volatility expansion helps.
• Out-of-the-money puts price more attractively than calls, making the put version the cheaper build.

Risks to respect

• Centre risk: a quiet market that settles near the middle strike delivers the full capped loss.
• Poor reward-to-risk: the credit is small relative to the worst case, so timing and probability matter.
• Time works against you: while the price hovers near the centre, decay erodes the position.
• Execution drag: four legs add brokerage and slippage that can swallow a thin credit.

Short put butterfly vs short call butterfly

The short call butterfly builds the same inverted tent from calls, and the two produce a near-identical payoff around the middle strike. The choice is practical: traders pick whichever set of strikes prices better and trades more liquidly on the day. When out-of-the-money puts carry a richer volatility skew — common on Indian indices — the put-based build can collect a slightly larger credit.

Short put butterfly vs long strangle

Both bet on movement, but the geometry differs. A long strangle buys an out-of-the-money call and put, so its reward grows with the size of the move — open-ended for a debit. The short put butterfly caps its gain at the small credit and only needs a move past the wings, not a runaway one. The butterfly is cheaper and bounded on both ends; the strangle pays much more on a large break.

Why is it called a “butterfly”?

The name describes the payoff shape: a central body of two contracts flanked by two outer wings, like a butterfly's. The short (or reverse) version flips that diagram upside down — the central peak of the long butterfly becomes a dip into the loss zone, while the wings sit in profit. Same anatomy, inverted result.

Frequently asked questions

Is a short put butterfly bullish or bearish?

Neither — it is a movement bet. It keeps its small credit if the underlying moves away from the middle strike either way, and only loses if the price pins the centre.

What is the maximum profit on a short put butterfly?

The net credit received on entry. You keep it in full whenever the underlying expires beyond either wing strike.

What is the maximum loss on a short put butterfly?

The wing width minus the net credit, multiplied by the lot size, realised only if the price expires exactly at the middle strike. The risk is defined.

How is it different from a short call butterfly?

It uses puts rather than calls but produces almost the same inverted payoff. Traders pick whichever strikes price better or are more liquid on the day.

The bottom line

The short put butterfly is a neat, defined-risk way to fade a pinning view using puts: collect a small credit and profit whenever the market makes a decisive move away from the centre. The structure is cheap and the worst case is known, but the reward is modest against the capped loss at the middle strike — so it belongs with traders who have a genuine reason to expect a break and want bounded risk while expressing it.

Related strategies & terms

• Short Call Butterfly — the call-based inverted butterfly with the same payoff.
• Long Put Butterfly — the mirror trade that profits on a pin.
• Long Strangle — an open-ended way to bet on a big move.
• Defined Risk · Breakeven · Implied Volatility