Paid $1 for a Put Butterfly

Thursday afternoon the Russell 2000 had slid from 2,902 to 2,811 in two days, RVX had popped from 18.7 to 21.0, and my weekly short strangle was sitting there with a put side that suddenly carried real delta. I did not touch the strangle. I bought a broken-wing put butterfly below the market instead — and collected money to take it.

The structure: RUT November 6 puts at 2610/2630/2640, filled at a net credit of $1.00 per package. This post is the fill, the math that made a crash structure cost nothing, and what it does and does not protect. None of it is a "make money every week" trade.

One package is three puts, same expiry: buy one 2610, sell two 2630s, buy one 2640. The fills, per share of premium:

Wings cost 39.02. Bodies brought in 40.02. Net credit: $1.00 per package — I was paid to own a structure whose maximum payoff is a crash landing on a specific strike.

By construction the package is flat: net delta about +0.006, net vega about −$0.08 per package, theta roughly +$1 per package per day. It is not a directional bet and it is not a volatility bet. It is a positional bet — that if the crash comes, it lands in a zone, and I picked the zone at 2,630, about 7.3% below Friday's 2,837.55 close.

The textbook put butterfly is symmetric — wings the same distance from the body — and almost never fills for a credit. Mine is broken on purpose. The body sits at 2,630, ten points below the 2,640 wing and twenty points above the 2,610 wing.

Here is the wing math. The near wing (2,640, ten points out) is rich at 21.29. The far wing (2,610, twenty points out) is cheap at 17.73. If both wings sat ten points away, their average would be above the 20.01 body and the fly would cost a debit. Dropping the lower wing to 2,610 drags the wing average down to 19.51 — under the body — and that 50-cent gap is the credit. You are trading ten points of deep-downside payoff room for cash today.

Put skew did its part: implied vol ran 22.7% on the 2610s down to 21.8% on the 2640s, so every leg carried premium. But skew prices the legs; the break in the wing prices the fly. IMPORTANT: this only works when the far wing is far enough out that its cheapness drags the wing average under the body — a symmetric fly at these strikes would have been a debit.

Per package, at November 6 expiration:

So the shape is: risk about $9 to make up to $11, with every landing between 2,620 and 2,640 paying $1 to $11 and no crash at all paying $1. Defined risk in both directions. The loss floor is what the broken wing bought — the same credit that made the entry free narrowed the downside payoff zone.

This is the part most butterfly write-ups skip, and I learned it the hard way by stress-testing the structure on paper after the fill.

At expiry, the fly's maximum payout is small against what a real crash does to short strangles. If RUT sits at 2,630 in November, the fly pays its $1,100 and the strangle book bleeds far more than that. It is not portfolio-margin relief either — the fly lives in a separate account from the strangles, so the stress tests never see it.

The value I actually care about is the mark mid-crash. While the market is falling and the short legs are losing, the fly's value grows fastest — and that is when you sell it. It is insurance you are supposed to sell into the event, not hold to expiry hoping for a perfect pin. A structure that only pays at the exact bottom is a lottery ticket; this one pays on the way down. Do not confuse the two.

And the honest-risk aside: if RUT gaps below 2,610 and stays there, the fly owes its max loss and the strangles lose anyway. This is a monetization tool for a specific zone, not a seatbelt. Not a "make money every week with 100% certainty" trade — it is a defined-risk bet on where a crash lands.

The double diagonal itself did what it is built to do, which was nothing. The short strangle sat at 21 days to expiration all week, rolled on September 17 and left alone. The put side sold at that roll carried about +0.35 delta per contract by Friday — the market came to it, not the other way around. The protective anchors — long June puts and calls more than eight months out — did their job on the vol pop: net across the book, roughly $827 of vega per contract per volatility point, so the two-day RVX move from 18.7 to 21.0 was worth about $1,900 of mark per contract. Net theta ran about $106 per contract per day, short-premium harvest minus the anchor drag, and book delta stayed near zero.

The roll-quality scan had its best week in four: alpha per unit of vega came in at +0.024, fourth best of 24 tracked weeks, with weekly rolls filling about $0.13 per contract better than the model's fair value. One good week inside a soft September — but the mechanics held while the market tested them, which is the part worth documenting.

The strangle will its roll window Monday around 18-19 days to expiration. I did not roll last week due to the more harsh down move. I wanted to see if it rebounded and it did, somewhat. The rule is mechanical: on a Tuesday-through-Thursday RVX spike of 1.5 vol points or more at 22-25 DTE, roll that day; otherwise roll Monday. No spike this week to that degree, so Monday it is. Roll no more than $30 down at most, keep the anchors where they are, and let the fly sit until it is either worth selling into a move or worth nothing at expiry.

That is the discipline: the income engine gets rolled on schedule, the protective anchors do not get touched, and the crash-zone structures get managed by their mark, not by hope.

Three put strikes at one expiry: buy one lower-strike put, sell two middle-strike puts, buy one upper-strike put. The position reaches maximum value at expiration when the underlying pins the middle strike. Both risk and reward are capped. When the wings sit at uneven distances from the body — a broken-wing butterfly — the trade can fill for a credit, trading capped downside payoff room for cash today.

When the middle strike's premium is richer than the average of the two wings. Here the 2630 body traded at 20.01 against a 19.51 wing average, so selling two bodies and buying the wings collected $1.00. The credit came from the broken wing: the far lower strike was cheap enough to drag the wing average below the body.

Not in the margin sense — placed in a separate account it never shows up in the strangle account's stress tests, and its expiry payout is small against a real crash. Its practical use is the mid-crash mark: it gains while the strangle bleeds, so it is worth selling into the move. Think targeted zone monetization, not insurance.

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