If there is a significant swing in either direction, the volatility strategy known as a short put butterfly may prove profitable. In contrast to a long put butterfly
This Strategy involves simultaneously selling put options at three different strike prices, with the middle strike being higher than the lowest and highest strikes. The options have the same expiration date and are typically used in a neutral market outlook. The strategy is designed to profit from a narrow trading range in the underlying security.
The trader profits from the strategy if the price of the underlying security remains within a certain price range at expiration. If the price of the security is outside of this range, the trader will experience a loss.
Leg 1 minus the net credit received
Leg 3 plus the net credit received
stock price to be less than Leg 1 or more than Leg 3
is limited and is equal to the net credit received to enter the position.
is limited and is equal to the difference between the prices at which the options were sold and bought.