A long put butterfly buys 1 OTM put, sells 2 ATM puts, buys 1 ITM put — equidistant strikes, same expiration. Mirror of the call butterfly. Same risk-reward asymmetry, expressed bearishly.
Setup mechanics identical to the call butterfly inverted. Use cases differ: put butterflies are sometimes used as crash hedges sized to print on a specific drawdown level (e.g., set up to max gain at SPY -10% from current price). They're cheap relative to the potential payoff and pay off only in a precise scenario, which is exactly what a budget-conscious tail-risk trader wants.
Equity put skew applies — the OTM put leg costs more relative to its delta than the equivalent OTM call. That makes put butterflies slightly more expensive than equivalent call butterflies on the same underlying, but also means the wing-leg short premium collected is higher. The net effect is roughly neutral on cost; choose put butterfly when the directional thesis is bearish.
Frequently Asked Questions
Why use a put butterfly for crash hedging?
Cheap entry, defined risk, and max payoff at a precise price target makes it a budget-friendly tail hedge — better than long puts when the catastrophic level is well-defined.
Long put butterfly or bear put spread?
Bear put spread for a directional bearish thesis. Long put butterfly when you expect the stock to land at a specific price.