Cash-Secured Put vs Iron Butterfly
A cash-secured put sells one put with the full purchase price set aside, so the worst case is owning the shares. An iron butterfly sells a call and a put at one strike and buys protective wings, capping the loss in cash and never producing a position in the stock.
Both of these collect a credit and both want a quiet market, which is where the resemblance stops. One ends in cash or in shares; the other ends in cash, always. That difference decides almost everything else.
What each one is
A cash-secured put sells one put with the full purchase price set aside, so an assignment is funded and produces a shareholding. Cash-secured put covers it.
An iron butterfly sells a call and a put at the same strike and buys further options either side, producing a credit with a capped loss. Iron butterfly covers the four legs, and iron condor covers the version with the short strikes spread apart.
One underwrites a company and the other underwrites a location. Whereas the put seller is expressing a willingness to own a business at a price, the butterfly seller is expressing a view about where price will finish and nothing at all about what the company is worth.
Where they differ
What the worst case actually is. The put’s worst case is holding stock bought above the market, which you can keep, sell calls against, or hold for years. The butterfly’s worst case is a cash loss that ends when the options expire and leaves nothing behind.
How much capital each needs. The put requires the entire purchase value of the shares. The butterfly requires the distance to the wing, less the credit — usually a small fraction of the same figure.
Which direction hurts. The put only loses if price falls. The butterfly loses in either direction, because a large rise takes price past the upper wing exactly as a fall takes it past the lower one.
How precise each has to be. The put needs price above one level. The butterfly needs price near one level at expiry, and finishing anywhere precise is not something the market cooperates with. The butterfly’s maximum profit exists only at the middle strike, and it shrinks with every point price finishes away from it.
Where they agree
Both are paid a credit at entry and both keep it if nothing much happens.
Both are short volatility, so an increase in expected movement damages each immediately.
Both have a defined worst case, though one is measured in shares and the other in cash.
And both need liquid chains, since the credit is small relative to the spreads being crossed.
Which one to use: Cash-Secured Put or Iron Butterfly?
Sell the put when you want the shares. The strategy only makes sense if assignment is acceptable, and when it is, the worst case stops being a loss and becomes a purchase.
Sell the butterfly when you have a level and no interest in the company. It is the structure for a view about where price sits rather than about what a business is worth, and it never obliges you to own anything.
Sell the put when capital is idle and abundant. Setting aside the full purchase price is only reasonable if the money had no better use.
And sell the butterfly when capital is the constraint. The same view costs a fraction as much to express, at the price of needing far more precision about the outcome.
Why “defined risk” is the wrong axis here
Because both have defined risk and the definitions are not comparable. The butterfly’s cap is a number. The put’s cap is a shareholding, which can be worth more later, can pay dividends, and can be sold when you choose rather than when an expiry decides.
And because the trading costs are four times apart. One leg entered and exited pays one round trip; four legs pay four, which is a real drag on the butterfly’s smaller credit.
Only one of the two can be repaired once it goes wrong. A put can be rolled down and out for a further credit, or simply taken as shares and worked with for years, whereas a butterfly has a fixed expiry and four legs to unwind.
Rolling the butterfly usually costs more in spreads than the remaining credit is worth, so the position that looked cheaper to open is the one with fewer ways out of it.
The original data
Cash-secured puts appear in 8 videos at a median of 30,048 views across 7 channels, and iron butterflies in a single video at 27,675 views.
Nine videos between them, and near-identical median audiences. Similar demand for two positions whose worst cases are not the same kind of thing — one a purchase, the other a payment — and no title anywhere in the corpus draws the distinction.
The question: Would you own this company at the lower level?
The answer to that question picks the strategy. If it is yes, the put. If the question does not apply, the butterfly.
When it fails
The characteristic failure is choosing the butterfly because the capital requirement is smaller. The smaller number is real, and it buys a position that has to be right about where price finishes rather than merely about which direction it avoids. A trader who would have been comfortable owning the shares takes the cheaper structure instead, price drifts past a wing, and the loss is total on a move that would have cost the put seller nothing at all.
A second failure is selling puts on companies chosen for premium size, which selects for the most volatile names rather than the ones worth owning.
A third is placing a butterfly with no reason for the strike, since its narrow zone is payment for precision.
A fourth is running either through an announcement, where a gap resolves the position before any management is possible.
And a fifth is comparing the two by credit alone, ignoring that one figure sits on the whole share price and the other on the width of a wing.
Related
Cash-secured put covers the funded obligation and assignment. Iron butterfly covers the four legs and the capped loss. And iron condor covers the wider, more forgiving relative.
The thing people miss is that these two are underwriting completely different events. One of them says a company is worth owning at a price. The other says nothing about the company at all and everything about where it will finish.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.