Details about Long Put Butterfly Spread Trading with Payoff Chart explained with an example
In our past series, we covered the Long Call Butterfly Trading, i.e. the Butterfly spread position was constructed using the Call Options. In this article, we will discuss the same Long Butterfly Spread but now constructed with the Put options - Long Put Butterfly Spread Options Position and how that can be traded. Long Butterfly Spread offers the options trader a limited risk limited profit potential and is considered to a direction neutral strategy - which means traders should get into this Long Put Butterfly Spread Option trading when they dont expect the underlying stock or index to move much and remain confined to a limited price range.

What is a Long Put Butterfly Spread Option position?
A Long Put Butterfly Spread Option Position is traded when the option trader has a neutral view on the price movement of the underlying stock or index - i.e. the underlying price movement is expected to remain confined into a limited range.
It offers capped (limited) profit and capped (limited) loss potential.
The name comes from the payoff function shape (see below) which resembles a butterfly. There are 2 LONG PUT and 2 SHORT PUTS required for this Long Put Butterfly Spread Option trading. Since it is constructed with Put options, hence the name includes PUT.
It is usually a net debit position i.e. the option trader taking the Long Put Butterfly Spread Option position has to pay a net option premium upfront.

In which scenarios is the Long Put Butterfly Spread Option Position profitable to the trader?
The Long Put Butterfly Spread Option trading is profitable to the trader when the underlying stock price does not move much in either direction and stays close the middle ATM strike price (see below).

Always try to select highly liquid stocks as underlying for options trade.

How is the Long Put Butterfly Spread Option constructed or configured?
The Long Put Butterfly Spread Option can be constructed by taking 4 option positions -
1) 1 * ITM Long Put
2) 1 * OTM Long Put and
3) 2 * ATM Short Put positions.
(Want to know what is ITM, OTM, ATM in Options? See Moneyness of Options - OTM, ATM, ITM Options)
Theoretically, here is how it looks:

Can we have an example of Long Put Butterfly Spread Option ?
Suppose that IBM stock is trading at around $50 per share (the underlying) - just for an example. Using your own research or forecasting mechanism, you come to a conclusion that the IBM stock price will NOT move much in either direction in the next 2 months and is expected to stay at around the same levels of $50.
So this makes an ideal scenario to go for the Long Put Butterfly Spread Option Position.
Hence, you BU (or go LONG) the following:
1 ITM Long PUT with Strike price of $65 at a option price of $17
1 OTM Long PUT with Strike price of $35 at a option price of $3
and you sell (or go SHORT) the following
2 ATM Short Call with Strike Price of $50 at a option price of $7 each.

Hence, you pay $17 + $3 = $20 for 2 buys, while you receive $7 + $7 = $14 for 2 sells. Overall net debit for your Long Put Butterfly Spread Option comes to $14 - $20 = - $6

Payoff function for Long Put Butterfly Spread Option

Here is the payoff function for Long Put Butterfly Spread Option with all 4 options without the price being considered:

Now, let's add them up together to get the NET ORANGE colored payoff function of Long Put Butterfly Spread Option - note that price is still not considered:

Finally, let's make the adjustment for the net price of $6 you paid to construct this Long Put Butterfly Spread Option and here we get the BROWN colored final net payoff function for Long Put Butterfly Spread Option with price factored in:

Let's now see the Profit & Loss Calculations for Long Put Butterfly Option