Short Put Butterfly Option Screener

Hi, and welcome to the Options Learning Center. I'm going to show you how to sell short put butterflies and use Barchart to get the most out of the strategy.

What Is A Short Put Butterfly Spread?

The short put butterfly is a directional options strategy involving four put options, two at the same strike price, on the same underlying asset, and with the same expiration date. This strategy works best if you anticipate the asset will trade with higher volatility by expiration. For example, you might trade this type of strategy right before an earnings announcement or a big announcement. You'll hit the maximum profit condition if the underlying asset's trading price ends outside the outer strike prices.

Short Butterfly Spread Options Strategy:

• Combines Four Put Options
• Same Underlying Asset and Expiration
• Profit: Underlying Trades Beyond Outer Strikes
• Result: Bull Put & Bear Put Spread
• Max Profit: Net Credit Received
• Loss: Asset Price Ends at the Middle Strike

To set up the trade, you'll sell one put option, buy two puts at a higher strike, and sell a put at an even higher strike. All options share the same underlying asset and expiration date, with strike prices equally spaced.

Short Put Butterfly

• Sell One Put (lowest strike price)
• Buy Two Puts (higher strike price)
• Sell One Put (highest strike price​)

The result is a bull put and bear put spread that results in a net credit.

The goal of a short put butterfly is for the underlying asset's price to trade outside the outer strike prices. If this happens, you'll hit the maximum profit condition, allowing you to keep the net credit. The maximum loss occurs if the asset price settles at the middle strike price at expiration.

Trade Examples

There's no need to manually look through the entire market when you can screen for short put butterflies using Barchart's option screener. Let me show you how.

Screening The Market For Short Put Butterfly Trades

To access the Short Put Butterfly screener, go to Barchart.com, click on the Options tab, and then click on Short Put Butterfly Screener. You'll be brought to a results screen for short put butterflies. These trades represent results based on a default filter that balances risk and reward, to give you a good starting point.

You can rearrange the column heads from highest to lowest or in reverse by clicking on the column headers. These are already a good set of trades that balance risk and reward. But if you'd like to adjust the search parameters, you can click Set Filters at the top, which will take you to the options screener page.

On the screener page, type your desired filter into the “Add Filter” field and click “Add.” If you're unsure what to add, open the dropdown to select an option. Available filters include stock and options data, such as options analysis, underlying prices, trade details, company earnings, and technicals—everything you need to refine your trade is here.

For now, I'll remove the ones I added since I'll just use the default, but then I'll adjust some of the selections here. First, I'll click on ETF in Security type so ETFs will appear on the results. Then, I'll scroll all the way down to the probability of loss, which is arguably the most essential filter, since this predicts the chance of the trade ending at a loss, even for a cent.

So, for illustration, I'll set this to 20% or less. Now, I'll click on See Results. Here we go! Now I can rearrange the risk/reward column so I can get the trades arranged from the lowest to highest. And I'll take the top trade to use it as an example.

But before I explain the trade, let me show you how you can save your screener to reuse it later. Just click Save Screener near the top right, then type in the screener's name. At the bottom, you can also have Barchart email you at a specified time with your trades. It's that easy. Now that's done, let's move on to the trade example.

According to the screener, you can set up a short put butterfly spread on SPY, with the ETF currently trading at $571.04. Here's how this trade works: you start by selling the $576-strike put, collecting a premium of $10.55 per share. Then, you buy two $584-strike puts, paying $15.16 per share for each. Finally, you sell the $592-strike put, collecting $20.98 per share.

This setup results in a total net credit of $1.21 per share, or $121 total for one contract. Your maximum loss on the trade is $6.79 per share. All options expire on November 15, which from the time of recording is 11 days until expiration. The trade has a 19.6% probability of loss, with a risk-to-reward ratio of 5.61 to 1.

I also find it's best to know the breakeven points on the upside and downside when monitoring the trade. Barchart gives you the breakeven points, but, if you want to calculate it yourself, add the net credit to the lower strike to get the downside breakeven, and subtract the net credit from the higher strike for the upside breakeven, and that's it. This gives you breakeven points of $577.21 on the lower end and $590.79 on the upper end.

Breakeven Calculation

• Lower Breakeven: Lower Short Put Strike + Net Credit
• Upper Breakeven: Higher Short Put Strike - Net Credit

Profit Scenario

Short put butterflies profit when the underlying asset's price moves beyond the short strike prices. So, if SPY trades above $592 or below $576 at expiration, you hit the maximum profit condition. To find out the maximum profit, just subtract the premium paid from the premium received for the trade. Remember, the premium paid is multiplied by two since it's two long puts. In any case, that brings us to $121 profit total.

Premium Received: $10.55 + $20.98 = $31.53
Premiums Paid: $15.16 * 2 = $30.32
Maximum Profit: $31.53 - $30.32 = $1.21 * 100 = $121

Loss Scenario

On the other hand, if the price of SPY ends at the long put strike instead, the trade will end at a maximum loss. To calculate the maximum loss, you'll need to take the difference between the long strike and either one of the short strikes which is called the spread's width, and then subtract the net credit. For this trade, that's $679 per contract.

Width Of The Spread: $592 - $584 = $8
Net Premium Received: $1.21
Maximum Loss: $8 - $1.21 = -$6.79 * 100 = $679

Profit/Loss Across Different Price Points

For a better understanding of how short put butterflies look, here's a graph with profits and losses from different price points.

As you can see, the maximum loss occurs only at the long strike price, if SPY trades at $584 at expiration. And the further away the ETF trades from the long strike at expiration, the better the trade works out- up until it exceeds one of the short strikes. If that happens, you'll hit the maximum profit condition on the trade.

Screening For Short Put Butterflies For Specific Assets

So that’s screening the entire market for assets to use for short put butterfly trades. But what about if you have a specific stock in mind? You can do that in a couple of easy steps.

All you need to do is go to the stock or asset's Price Overview page on Barchart.com. Once there, navigate to the left and look for Butterfly spreads. Then, click the short put butterfly tab to see the trade search results.

You can click on the dropdown to change the expiration dates, change trade legs, rearrange each column, or click the screen button then the set filter tab to access the option screener page for a more granular search. It's really that easy.

Closing Your Positions Before Expiration

It is always a good idea to close your positions right before expiration when using any strategy that requires writing or selling options. For this example, you have two short positions in this trade, and if either is in the money by expiration, the option will be automatically exercised, or, in your perspective, you will be assigned.

• The strategy includes two short positions
• ITM option(s) will be exercised at expiration

If any of the short puts gets assigned, you are obligated to buy 100 shares of the underlying for every contract you wrote, which can be significantly higher than the current selling price. Hence, closing that stock position can end in a loss.

• Assignment means buying 100 shares
• Adverse market conditions could lead to a loss

You can also sell the relevant long put positions to capture any remaining value, which might mitigate some of your losses. But keep an eye out for trading fees, as it may not be worth it.

• Sell Long Puts to Capture Any Remaining Value
• Watch Out for Trading Fees

Pros and Cons of Short Put Butterflies

A short put butterfly spread has a well-defined risk/reward profile, meaning you know what you're getting into right at the get-go. You also receive a credit at the start of the trade, and can earn a profit if the underlying trades above the upper breakeven, or below the lower breakeven point. Lastly, the strategy is best used when you expect significant price movements.

Pros

• Defined Profit/Loss Profile
• Credit Received At Start of Trade
• Wide Profit Range
• Profit From Upside or Downside
• Profit From Significant Price Movements

However, short put butterflies come with a low profit potential. It is also more complex than single-legged option trades, and, of course, the trading fees from the four legs can eat into your profits. Lastly, the strategy requires high volatility and a significant price movement; otherwise, you'll experience reduced profits or even losses.

Cons

• Limited Profit Potential
• Complexity
• Potentially High Trading Fees
• Requires High Volatility And Significant Price Movement

Conclusion

The short put butterfly is best used when you expect a significant price movement even without knowing its direction. Without a big price move, however, the trade will likely end at partial profit at best or maximum loss at worst. Additionally, the strategy requires careful planning and monitoring, especially at the onset. That's why using option screeners is helpful in maximizing your chances of profiting from the trade.

Don't forget to visit the Barchart Options Learning Center where you can find more about short put butterflies, and also find other option trading strategies broken down into their working parts.