Iron Butterfly

An iron butterfly sells an at the money call and an at the money put at the same strike, a short straddle, and buys an out of the money call and an out of the money put as protective wings. You collect a large credit. Maximum profit occurs if the underlying finishes exactly at the middle strike at expiration. It is a tighter, higher reward, lower probability cousin of the iron condor, and it suits traders who expect the price to stay very close to where it is.

Construction#

All four legs share the same expiration.

Payoff at a glance#

Worked example#

Iron butterfly vs iron condor#

See Iron Condor.

Iron butterfly vs long butterfly#

An iron butterfly (sold for a credit) and a long call butterfly (bought for a debit) at the same strikes have nearly identical payoffs, as put call parity implies. Traders choose based on prices, liquidity and assignment considerations. See Butterfly Spread.

When to use an iron butterfly#

• Very low expected movement, such as a stock pinned near a large open interest strike into expiry. See Options Open Interest Analysis.
• High implied volatility expected to fall, such as after an event. See Volatility Crush and Expansion.
• Short term trades where time decay is fast.

Managing an iron butterfly#

• Take profits early: many traders target 20% to 30% of the maximum credit, since the price rarely finishes exactly at the middle strike.
• Adjust if price drifts: roll the position to centre it on the new price, or convert to an iron condor by moving one short strike.
• Close before expiry to avoid pin risk and assignment on the at the money short options. See Exercise and Assignment.

Risks#

• High gamma: at the money short options react quickly to price moves, especially near expiry. See Gamma.
• Narrow profit zone.
• Assignment risk on at the money short options, which are always close to in the money.
• Volatility spikes.

Common mistakes#

• Expecting maximum profit: the stock rarely closes exactly at the strike.
• Holding through expiry with short options at the money.
• Using it before big events that can push price far away.

Frequently asked questions#

What is an iron butterfly?#

A four leg strategy that sells an at the money call and put and buys an out of the money call and put, profiting most if the underlying ends at the middle strike.

What is the difference between an iron butterfly and an iron condor?#

An iron butterfly sells both short options at the same strike, collecting more premium with a narrower profit zone; an iron condor uses separate short strikes for a wider range.

When does an iron butterfly make the most money?#

When the underlying finishes exactly at the middle strike at expiration, so both short options expire worthless.

Next, learn the classic debit butterfly in Butterfly Spread.