Generally, a trader opening a Long Put Butterfly traditionally expects a precise decrease within a certain price range for the given stock, and flat-to-decreasing volatility. To set this strategy up, the trader opens 3 separate options in a spread, called “Legs”. They buy one volume of an out of the money put; sell two volume of another out of the money put on a second strike, and buy a third out of the money put on a third strike. This means the trader is paying a small debit to open what’s considered a “Limited Loss, Limited Gain” strategy.
(Side note; since the middle strike that is sold to open consists of 2 contracts, some regard the Long Put Butterfly as having 4 legs; but since there are only three options and three strikes utilized, 3 legs is more accurate than 4 in this case).
I know that was a lot of words with not much insight. So, let’s go ahead and build a Long Put Butterfly using the Unusual Whales Options Profit Calculator to get a better visual of how this strategy works.
Let’s look at this Long Put Butterfly spread, using Johnson & Johnson ($JNJ) as an example. To setup the strategy, we buy to open the $170 call, sell to open two contracts of the $160 put, and buy to open the $150 put, to set up a 170/160/150 put butterfly expiring on 8/25/2023.
To calculate the cost of a Long Put Butterfly, you take the sum of the two outside legs (called the “wings” of the butterfly); in this case that is the $170p ($2.07) and the $150p ($0.31), then subtract the credit received for selling the two contracts of the middle leg, $160p ($0.53 * 2, or $1.06 in credit received.) So, the cost of the trade is this:
$2.07 + $0.31 - $1.06 = $1.32 Debit to open this spread
Due to the sold puts, the maximum loss we can realize in this trade is the Net Debit we put in; $132 is the most we can lose on this trade if it goes against us. However, with limited losses also come limited profit potential. As the stock price loses value, we profit off the two legs we longed (the $170p and the $150p). But remember, we are short the middle leg. That middle leg will also gain value, but since we received credit for selling them short, as those contracts gain value, we lose money on them.This caps our max profit at $867, which we’ll explain in a moment.
In order to capitalize on this spread, we want the underlying stock price to remain within the range set by the two wings (the outside legs of the trade, in this case $170p and $150p). This range is where the profit from the two legs we longed and the losses from the one leg we shorted is favorable to the long contracts. Let’s visualize where profitability and losses occur on the Profit and Loss graph.
As you can see above, our trade will turn a profit in between the prices of $150 and $170; the wings of our spread. By the date of expiry, if the stock price rises to $170, we begin to realize losses due to the loss in value of the $150p and the $170p. Yes, this is offset somewhat by the credit we get to keep from our shorted $160p, but the caveat there is that the value of those contracts can only go as low as $0.
Since we only received $0.53 per contract on our shorted $160p, we can only profit $106 on that leg. Our losses on the long legs of $170p and $150p outweigh the credit received for the $160p.
In a perfect world with this spread on JNJ, we would want the stock price to trade at or near $160 per share to realize max profit. At this price, the $150p and $160p will expire worthless, and the $170p will be at the maximum profitability without being offset by the worthless $150p and $150p (meaning we LOSE $31 on the $150p, GAIN $1.06 on the short $160p, and GAIN $75 on the $170p for a total maximum profit of $867.
Now, we’ll take a look at trades on $CRWD, found and tracked in the Unusual Whales community by YourBoyMilt with his interpretation of the flow, and of this specific trade.
Before we get to that, please take a moment to check out today’s sponsor, TradeStation!
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Thank you for taking the time to check our TradeStation; now, back to the flow! Let’s look at a community trade and how they used Unusual Whales.
Confluence across strikes confirming short term action, by YourBoyMilt
There’s a simple formula I like to use beside closing my eyes and YOLOing when it comes to choosing a worthy whale’s play–confirmation of short term strikes with multiple tickers.
Here with CRWD we saw what is likely the same whale not only hop into the short-expiration 8/11 put contracts, but they were all deep outside the money and across three different strikes.
In my opinion, multiple strikes on the same date = high-confidence
Generally–as I always say–we are trying to avoid hedges in this game. When we see a whale buying multiple contracts, to me that says “trying to preserve opportunities in multiple profit scenarios” rather than “I better pick this up just in case”. It speaks to confidence and aggression–something we would see from a speculative trader, rather than someone playing it safe.
Continued holding of the position during down days
(5 trading days later they were still holding the positions)
CRWD already slid with the market, but the whales still held their positions while in profit. Although we don’t want to necessarily hold when they sell and sell when they sell, it is a boost of confidence, particularly if we see…
Additional buying of deeper OTM puts on the same expiration
This was what gave us more confidence than anything else–you can see here that they kept adding even after the stock dipped, going deep outside the money with the 138p, same expiration, with only 4 days left until expiration. If they were hedges they’d already be in the money, so why add?
Overall, what this play was meant to show is the importance of seeing multiple nibbles at the same expiration, which can help you build confidence a move is coming…especially if they continue adding as it dips, like they did with CRWD.
As of press time, they are still holding the 138p 8/11 puts. Maybe a CPI play? Maybe news? Who knows; but I personally took profit so as to not lose value due to theta decay as we draw closer to the expiration date.
I hope these explanations and examples from the community give you a better idea of how people are utilizing the Flow for their own trading. For more education and guides, you can head over to the Unusual Whales Courses page! Feel free to share or subscribe if you have found this post useful!
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