Iron Butterfly Strategy
Like iron condor but short strikes are ATM. Higher premium, narrower profit range.
What is a Iron Butterfly?
An Iron Butterfly sells an ATM straddle and buys OTM wings for protection. Four legs with three strikes. Higher premium than iron condor but narrower profit zone. Best when expecting very low movement around current price.
When to Use a Iron Butterfly
Use when you expect stock to stay exactly at current price. Best in high IV. Tight profit zone requires active management. Typical 30-45 DTE setup.
Key Formulas
- Max Profit
- Net credit × 100 (at ATM strike exactly)
- Max Loss
- (Wing width - Net credit) × 100
- Breakeven
- ATM strike ± Net credit
Example Trade
AAPL IB at $200: Sell $200C and $200P, Buy $210C and $190P for $4 credit. Max profit $400. Max loss $600.
Common Mistakes to Avoid
- Expecting stock to hit exact strike (rare)
- Holding past 50% profit target
- Underestimating gamma risk near expiration
- Selling in low IV (not enough credit)
Related Strategies
Frequently Asked Questions
What is a Iron Butterfly?
An Iron Butterfly sells an ATM straddle and buys OTM wings for protection. Four legs with three strikes. Higher premium than iron condor but narrower profit zone. Best when expecting very low movement around current price.
When should I use a Iron Butterfly?
Use when you expect stock to stay exactly at current price. Best in high IV. Tight profit zone requires active management. Typical 30-45 DTE setup.
What is the maximum profit and loss for a Iron Butterfly?
Max profit: Net credit × 100 (at ATM strike exactly). Max loss: (Wing width - Net credit) × 100.
What is the breakeven price for a Iron Butterfly?
Breakeven: ATM strike ± Net credit. Example trade: AAPL IB at $200: Sell $200C and $200P, Buy $210C and $190P for $4 credit. Max profit $400. Max loss $600.
What are common mistakes when trading a Iron Butterfly?
Common mistakes include: Expecting stock to hit exact strike (rare); Holding past 50% profit target; Underestimating gamma risk near expiration; Selling in low IV (not enough credit).
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