What it is
A butterfly whose two wings are not the same distance from the middle. In this example, built from puts: buy one at today's price, sell two a little below it, and buy one much further down. Because the far wing is cheap and the two sold puts bring in a lot, the position opens for a net credit rather than the debit an even butterfly costs.
Moving the wing moves the risk. With a credit in hand and nothing to lose if every put expires, the side the short wing faces carries no risk at all. All of it now sits beyond the long wing, and there is more of it than an even butterfly would have.
What has to happen for it to make money
The stock has to stay above the single break-even, a little under the middle strike. Above the top strike every put expires and the credit is kept. Down to the middle strike the profit grows to its peak; below it the profit shrinks, turns into a loss past the break-even, and reaches the maximum loss at the far wing, where it stops.
So it suits a stock that holds steady, drifts up, or slips modestly toward the middle, and is hurt by a deeper fall. Before expiry, a drop in volatility helps.
Once it is on
The usual management is around the downside: watching the stock's distance from the middle strike and closing or rolling if a fall looks like it will continue past the break-even. A rally needs no action, since the credit is kept whatever happens above the top strike.
What goes wrong
A fall through the far wing. The loss is capped there, but it is several times the credit collected, because the wider wing is exactly what was traded for the credit.
Assignment near the middle. With two short puts in the middle and only one long put above them, a stock sitting between the strikes near expiry can leave you assigned on more puts than you hold protection for; closing before the last day avoids it.
Pros and cons
- Pro: opens for a credit in this form.
- Pro: no loss if the stock rises or holds.
- Pro: the worst case is capped and known.
- Con: the downside loss is larger than an even butterfly's.
- Con: the peak profit sits at a single price.
- Con: four contracts and uneven assignment risk.
In Restrike
Its legs are unequal in size, so the Log keeps them as three rows rather than folding them; give the three one strategy label and the scorecards read them together. Brokerage import is read-only, and Restrike never places a trade.